Pound Sterling Rallies on Bank of England Decision

- Bank of England boosts quantitative easing on Thursday
- Brexit negotiators report significant issues remain to be solved
- GBP voltile, but ultimately still trendless

Above: File Image of the UK's chief trade negotiator, David Frost. Image © Gov.uk, 10 Downing St

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The British Pound has risen against the Euro, Dollar and other major currencies following a Bank of England deicsion to boost support for the lockdown-ravaged UK economy, but upside will likely be limited by news EU and UK negotiators have confirmed significant differences remained between the two sides.

The Bank of England on Thursday announced it would boost quantitative easing by £150 billion, an amount significantly greater than the £100BN markets were anticipating,

The expansion of its asset buying programme takes the total to £895 billion and interest rates were left unchanged at 0.10%.

Both result came from an unanimous 9-0 votes on the Monetary Policy Committee.

The bigger-than-expected boost to quantitative easing would typically be seen as a potentially Sterling-negative development, but that no mention was made of negative interest rates appear to have been met with relief. 

"Sterling rallied as there was no surprise rate cut and no mention of plans to take rates negative," says Neil Wilson, Chief Market Analyst at Markets.com.

The Pound-to-Euro exchange rate has risen 0.15% on the day to trade at 1.1060.

Above: GBP/EUR went sharply higher in the wake of the BoE surprise. Lock in today's exchange rate for use over coming days and months, or set your desired target exchange rate, find out more.

The Pound-to-Dollar exchange rate has edged higher by 0.20% to trade at 1.2988. GBP/USD rose sharply from 1.2940 to above 1.30 after the announcement, eyeing near-term resistance peaks at 1.3050 and then the 1.3140 high at the peak of the 'blue wave' dollar selling on election night before the results showed a much tighter race than polls indicated," says Wilson.

When considering the Pound's reaction, it is also worth pointing out that the market might have been conditioned for substantially more quantitative easing to be announced owing to a number of unfounded leaks to the media

"Talk about shenanigans from UK’s Sun and Telegraph newspapers last night. The BOE said it would investigate the alleged leak to the Sun about the potential 200BLN size of today’s announced QE expansion and nobody questioned the Telegraph’s headline about the BOE considering negative rates when it had no credible sources. These headlines knocked GBP/USD lower last night and we believe they took the sting out of what should have been a bearish 150BLN QE number (when compared to the Reuters consensus of 100BLN) and they gave more attention than necessary to the BOE’s recent, well-known, narrative of it not wanting to do anything soon regarding negative rate policy," says Erik Bregar, Head of FX Strategy at Exchange Bank of Canada

Sterling Upside Limited

Despite gains made by the Pound following the Bank of England announcement, analysts warn gains might be limited. Indeed, the latest news out of Brussels and London suggests a post-Brexit trade deal is not yet assured, and the Pound should therefore remain on edge over coming days as a result.

EU Chief Negotiator Michel Barnier ambassadors from EU member states on Wednesday on the latest developments in negotiations, saying "despite EU efforts to find solutions, very serious divergences remain in Level Playing Field, Governance & Fisheries. These are essential conditions for any economic partnership."

He added the European Union is prepared for all scenarios.

UK Chief Negotiator David Frost on Wednesday briefed UK Prime Minister Boris Johnson on the status of talks.

"We've just finished two weeks of intensive talks with the EU," said Frost following the briefing, "progress made, but I agree with Michel Barnier that wide divergences remain on some core issues. We continue to work to find solutions that fully respect UK sovereignty."

Media reports suggest the negotiating teams will now take stock before reconvening in London on Sunday.

Talks are likely to continue for a further two weeks, with a summit of EU leaders on November 19 being widely tipped by commentators to present itself as the key moment where a Brexit breakthrough is achieved.

However, Johnson would be expected at some point before then to lay the foundations for any breakthrough via discussions with EU Commission President Ursula von der Leyen and then with other EU leaders.

Most notably, any discussions with France's President Emmanuel Macron is likely to be instrumental.

There are no days set aside for any such talks but past precedent suggests the week leading up to the November 19 summit will be a busy one and will likely be characterised by heightened volatility in Sterling.

Above: Joe Biden. Photo by Adam Schultz / Biden for President.

Short-term, foreign exchange markets will likely remain focussed on the outcome of the U.S. election where both candidates await the final results from a number of key states.

Wisconsin and Michigan - two important swing states - have both called for Democrat challenger Jo Biden overnight, confirming he is edging closer to the magic 270 electoral college votes required to take the White House.

Meanwhile, the Senate looks set to be retained by the Republicans.

A combination of a Democrat White House but a split Congress (the Democrats hold the House of Representatives) should ultimately be cheered by markets as the prospect of a sizeable covid-19 rescue package being agreed will be high, even if it will be smaller than that which would likely have been approved under a 'blue wave' sweep for the Democrats.

"The certainty with which markets price this outcome (close to 90% on betting markets) suggests the legal challenges the Trump campaign plans are currently not seen as credible (calling for a recount in Wisconsin and attempting to truncate the vote count in Michigan and Wisconsin). As such, the market reaction is so far skewed to the market-friendly outcome of a split congress, rather than the worst case scenario of a drawn out legal battle," says George Cole, Senior FX Strategist at RBC Capital Markets.

A Biden win but with a split Congress "implies a degree of gridlock in Washington, which ex-stimulus is not always a bad thing for the market," says Neil Wilson, Chief Market Analyst at Markets.com.

Wilson says less uncertainty over policy likely to support equities, particularly Big Tech, whilst a Biden presidency ought to see some degree of a reset with trade partners that would boost sentiment and corporate earnings.

"Stimulus delays could create near-term volatility, but it would be in no one’s interests to drag their feet for long given any ballot box risk would be two years away," adds Wilson, who expects the result will mean tax uncertainties are removed which would largely be positive for equity valuations.

A potential reset in trade relations with partners and China meanwhile has the Markets.com analyst see EM supported as well as European equities/currencies, which would also tend to boost US corporate earnings

"Not as bad for the dollar as a Blue Wave result with trade reset likely to support flows, also less fiscal expansion a factor, but USD seen weaker in this outcome as part of broader downtrend," says Wilso