GBP In Demand
The British Pound has been gaining against a broad basket of counter-currencies over the European morning on Friday, buoyed by a more optimistic tone from the BOE yesterday. The UK central bank’s May “Super Thursday” event had attracted a great deal of attention over speculation that the BOE might announce tapering of asset purchases. While no adjustments to either its rates or quantitative easing program were announced, the bank’s updated forecasts and forward guidance contained plenty to go off.
GDP Forecasts Revised Higher
In its updated forecasts, the bank is now projecting growth of 7.25% in 2021, up from the 5% forecast issued previously. This would mark the strongest UK economic recovery since 1941 with the bank citing the success of vaccinations and the UK’s reopening programme as the main drivers behind the expected lift in consumer spending. In its report, the BOE said: "GDP is expected to rise sharply in 2021 second quarter, although activity in that quarter is likely to remain on average around 5% below its level in the fourth quarter of 2019. GDP is expected to recover strongly to pre-COVID levels over the remainder of this year in the absence of most restrictions on domestic economic activity."
Services Sector Rebound
This more optimistic message from the BOE comes hot on the heels of the IHS/Markit services PMI which saw the non-factory sector reading surging to 61 last month. While the manufacturing sector had remained resilient throughout the pandemic as a result of the boom in demand from online hopping, the services sector had been hard hit, so news of a solid recovery will be well received by the central bank.
Inflation to Rise But Bailey Urges Caution
Notably, the services PMI also included a further increase in producer input prices, which now sit at their highest level in four years. Rising input costs have been one of the key themes driving the lift in rising inflation expectations. However, BOE governor Bailey said that as yet, there was no evidence of higher output costs as a result. Looking ahead, however, Bailey noted that the bank expects CPI to surpass 2% by year end though cautioned that the spike is expected to be temporary and the bank will retain accommodative monetary policy over the course of the recovery. Finally, Bailey warned that despite the optimistic outlook, downside risks remain and urged markets not to get “carried away” by the current recovery.
The recovery bounce off 149.55 continues today with price drifting back towards the 152.78 level. With little momentum in the market currently, the level is likely to hold at first test, continuing the range which has framed price action over recent weeks. While 149.55 holds, however, the focus is on a further break higher towards the 156.39 level next. To the downside, a break of 149.55 will open a test of 146.78 next.
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