The British pound has made somewhat of a comeback against its US counterpart over the past few trading sessions, after reaching its lowest level since 1985 as investors sought out the greenback as a safe haven asset. Many believe the size and effectiveness of the stimulus package on offer by the Bank of England will be key to the pound’s fortunes in the nearest future.
Following on from the US, the BOE has announced a range of measures to help the UK economy which includes £330bn of loan guarantees for businesses to see them through the tough times brought on by the coronavirus but so far such figures have failed to impress the market and much more is expected to be done.
“The U.K. has a co-ordinated monetary and fiscal policy approach but the size of the package is still being deemed by markets as insufficient,” said Hetal Mehta, senior European economist at Legal & General Investment Management.
“A new BOE governor only three days into the job whose monetary policy views are still largely unknown will also cause some nervousness.” Mehta added.
The Pound has lost significant ground against the Euro in March and while the British Currency has recovered some lost ground over the past few days the chances of further losses can’t be ruled out.
Negotiations between the UK and the European union regarding a post Brexit trade deal were supposed to be well under way by this time but the coronavirus epidemic has put this on hold which has caused a whole new level of uncertainty for the pound and the British economy overall.
“I’ve never seen the pound trade like this apart from Brexit,” said Jordan Rochester, strategist at Nomura International Plc.
“Here we are in a complete different ball game with the market completely uncertain how deep the hit to growth will be and how long it will last.” he added.
The Bank of England has also increased the total value of bonds the Bank will hold by £200BN taking the total to £645BN which is bound to push the yield paid by the government a lower and make them less attractive to the market.
This will also cause a reduction in demand for the British pound and may force the currency into a 1-1 situation against the Euro.
"The BoE asset purchases are a game-changer for GBP rates while an increasing number of risks could take EUR/GBP to parity," says Morden Lund, US & UK analyst at Nordea Markets.
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