Pound rally falters after BOE opens door to more stimulus

THE pound pared an earlier rally after Bank of England (BOE) governor Andrew Bailey signalled that the institution could pump more cash into bond markets, perhaps as early as in June.

Sterling whipsawed following rare early morning policy announcements, initially climbing as the BOE kept quantitative easing unchanged before falling back on Mr Bailey's comments. He noted that the central bank's gathering next month was before the QE programme runs out, and said commitment to act was "unwavering".

The spread of Covid-19 in March drove the pound down to its lowest level since 1985, but it has since recovered to trade around US$1.25 over the past month. Still, the outlook for the UK economy remains bleak, with the BOE expecting a 14 per cent contraction this year, before a 15 per cent bounce back in 2021.

"At their current pace, they will run out of firepower in July," said Ned Rumpeltin, European head of currency strategy at Toronto-Dominion Bank. "We were already quite convinced they would have to do more in the future anyway," he said, adding that it makes sense to sell the pound on any rally.

Sterling traded up 0.1 per cent at US$1.2361 by 12.29 pm in London, after rising as much as 0.6 per cent. Currencies typically fall on expectations for looser monetary policy, either through rate cuts or other stimulus.

The pound is undervalued to the dollar, according to purchasing power parity models. Yet, with the backdrop of a central bank looking increasingly poised to loosen policy further, rallies in sterling look unlikely.

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UK stocks held gains while bonds slipped, with 10-year yields up two basis points to 0.26 per cent. The country's Debt Management Office announced that it would sell 41-year gilts via syndication on May 19. That follows a surprise sale announcement for long-dated debt by the US on Wednesday.

Investors had been selling the pound earlier this week, expecting the BOE might boost stimulus or at least pledge to at Thursday's announcement. Two members of the monetary policy committee voted for an immediate £100-billion (S$175 billion) boost to the bond buying programme.

HSBC Holdings Plc said prior to the meeting that the institution had plenty of room to buy more bonds, if needed. The UK is set to issue the most debt on record this year to help finance Covid-19 spending, including plans to raise £180 billion of bonds between May and July. It is "highly likely" that the central bank would boost its QE programme by £100 billion, according to analysts at Nomura International Plc.

"The June meeting is clearly live," said Jordan Rochester, a Group-of-10 foreign-exchange strategist at Nomura. "QE will just be expanded." BLOOMBERG