All eyes are on the British Pound today, which is affected by a whole set of diverse factors from the Bank of England meeting and the Scottish elections, to global demand for risk assets. Should all of these factors work in one direction, we may see the start of the prevailing trend for weeks to come. However, if events have a divergent effect, we risk a severe spike of volatility and zero performance as a result.
The GBPUSD is currently trading unsteadily above 1.3900. The Pound has been adding for the last month, showing signs of ending a corrective pullback after an 11% rally from the lows of September to the highs of late February.
The Sterling has been balancing around the 50-day average for the last two weeks without finding enough meaningful triggers to choose a direction.
But such triggers might appear today. The Bank of England will announce its monetary policy decision, which could put the GBP in the “normalisation” group or the “wait-and-see” group. The first group includes the CAD, NZD, where central bankers have already rolled back emergency measures. These currencies are gaining strongly, trading near their highest levels in several years against the dollar.
The Fed and the ECB are in the second group, keeping the approach that inflation is not a problem and economic recovery is not yet secure, which is why all stimulus measures, including massive QE, need to be maintained.
The fundamentals allow the Bank of England to join the group of normalisation leaders. With clear signals of the start of the QE rollback and confidence in the recovery, GBPUSD could be in for a strong upside momentum towards the February highs at 1.4240 and further towards 1.5000 before the end of the year.
However, there are several bumps along the way for the Pound. One of them is the Scottish elections today. The main question is whether the Scottish National Party, which favours a referendum on independence from the UK to return to the EU, will get a majority in the local parliament.
Increased sentiment for separation from England in Scotland, Wales and Northern Ireland can further undermine the Pound’s recovery after Brexit, making politicians market makers for the Pound.
On top of this, the global context is weighing on GBPUSD. The pair remains sensitive to changes in demand for risky assets. Interest in “value” equities is relatively good news for the Pound and the British FTSE100, which hit 15-month highs in the morning. However, in the event of a persistent decline in global markets, GBPUSD runs the risk of coming under significant pressure, risking a quick return under the March and April lows at 1.3700.
