BoE: Dovish guidance compounded with Brexit and furlough uncertainty to weigh on the pound

The Bank of England (BoE) left its policy unchanged but hinted it is moving toward setting negative rates. GBP/USD dropped below 1.29 in response, and there are additional reasons to expect more falls, Yohay Elam, an analyst at FXStreet, reports.

Key quotes

“Winter is coming and so are negative rates – that is the message from the Bank of England. The BoE has moved from saying that sub-zero borrowing costs are in the toolkit to being briefed on how to implement them effectively.” 

“Negative rates have failed to boost the Japanese and the eurozone economies – but have dampened their respective currencies. So far in the coronavirus crisis, printing more money boosted currencies – as it allows governments to spend more. However, punishing banks for parking their funds with the central banks is unequivocally adverse for the currency.”

“The BoE released new guidance – no tightening until there is significant progress on the inflation goal. It expects inflation to remain below 1% – far off the 2% target – through early 2021. In addition, the bank says that there is a risk of a longer period of elevated unemployment. It said that for the current third quarter, it expects output to be 7% below the pre-pandemic levels seen in the fourth quarter of 2020.”

“Concerns about Brexit remain prevalent and the fate of the government's successful furlough scheme – which kept employment high during the crisis – is unclear.”