19.06.202009:56 Forex Analysis & Reviews: What will the pound's confusing movement lead to?

The British currency is on the warpath once again, fighting for leadership and at the same time trying to gain a foothold in the upward trend. The attempts of the indicated currency continue with varying success, and so far, it is trying to find a balance in the GBP/USD pair.

On Thursday evening, June 18, the British currency moved up and down: it experienced a severe decline from an unprecedented rise to a sharp decline. Such reversals were caused by the results of the meeting of the Bank of England, which slightly surprised the market. It can be recalled that experts predicted that the current rate would remain at 0.10% and the bond purchase program would increase by 100 billion pounds to 745 billion pounds before the meeting of regulator members.

As a result, both points of the plan were implemented, but some market participants expected more decisive action. According to analysts, the Bank of England did not attach much importance to monetary policy, dismissing most of the pressing issues. The regulator said that he was ready to adjust the current strategy as necessary, emphasizing that the losses of the British economy in the second quarter of 2020 were much less than expected.

The management of the Bank of England, having confirmed its readiness to increase the scale of quantitative easing, if necessary, also announced the implementation of the bond purchase plan by the end of the year. According to Pantheon analysts, this means a slowdown in the acquisition of bonds from the current 11 billion pounds per week to 6 billion. The British currency reacted violently to these decisions, rapidly soaring to 1.2550 from the previous level of 1.2490. The market was happy: it seemed that everything had turned in favor of the pound, and it could celebrate the victory.

However, the joy was temporary: the pound experienced a change in dynamics on Thursday evening, getting on a "roller coaster". After a dizzying rise, it encountered a strong decline. The GBP/USD pair could not hold above 1.2500 and quickly slid to low values. As a result, the pound declined by 0.98% to 1.2433, having previously reached a low of 1.2403. According to experts, the reason for this was the planned slowdown in the pace of asset purchases by the Bank of England. The market assessed these actions as a slightly "hawkish" position, which explains the short-term rise in the pound after the regulator's meeting.

The downward trend of the British currency continued on Friday, June 19, when the pair GBP/USD started at 1.2440. The pair did not show signs of increase, trading within the specified limits. Later, the GBP/USD pair, trying to leave the range of 1.2437 - 1.2438, still remained within this framework.

The probability of entering negative rates still hangs over the pound. This issue was bypassed at the last meeting, and the regulator has so far refused them, although the situation may change at any time. According to currency strategists at Morgan Stanley, the Bank of England will increase its asset purchase program by 300 billion pounds, to 945 billion in the next 18 months, that is, in June, November and May 2021.

Experts believe that under current conditions, quantitative easing will lose its effectiveness, and then the regulator will have to use other measures, including not very popular ones. These include negative rates at Morgan Stanley. The bank admits that the regulator will be ready to further reduce the rate in August 2020, and it will lower it to 0% in November. At the same time, experts from Morgan Stanley do not exclude the possibility that in the event of further economic failures, the Bank of England rate in 2021 could fall to -0.50%.

Regarding the short and medium-term, the pound is not optimistic at Morgan Stanley either. Bank experts say that by the end of this year, the GBP/USD pair will move in the side range. The pound could rise to 1.2500 in the third and fourth quarters of 2020, and Morgan Stanley believes that it could decline to 1.2200 in the first quarter of 2021. The Bank of England's policies and uncertainty over Brexit issues, which may not take place this year, have such a scenario.

The problem of Great Britain's exit from the European Union remains painful for both Britain and other European countries. Uncertainty in the trade negotiations between London and Brussels, which are currently at an impasse, reduces the chances of the British economy to successfully recover. What's worsening the situation are the difficulties associated with the devastating consequences of the COVID-19 pandemic.

According to analysts at Commerzbank, the inability of the British authorities to conclude trade agreements with the countries of the Eurobloc is alarming experts regarding the functionality of the political and economic systems of the country. Further delay in Brexit matters could significantly weaken the pound in the long run. As a result, experts from ING believe that the British currency will become one of the unpromising in the G10 currency space.

Regarding the short-term prospects of the pound, many analysts are more optimistic: they believe that the pound will be able to reach equilibrium. At the moment, the GBP/USD pair is on the way to balance, and in the medium-term, a strong "roll" caused by the decision of the Bank of England will come forward. However, the pound will have to cope with such constant pressure factors as Brexit, a weakening national economy due to COVID-19 and the threat of negative rates.