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Forex Market Analysis

May 06, 2021 | Currency Market Analysis

Global Themes

Buckle up for BOE & elections

• Will BOE signal policy tightening today?
• Keep an eye on Scottish election result
• Risk off flips to risk on


Will BOE signal policy tightening today?

The Bank of England’s (BOE) latest monetary policy decision and economic forecasts will be released at midday today. Some traders are calling for signs of policy tightening in the form of reduced bond buying or higher interest rates. Sterling could soar higher on such signals.

Although the BOE is expected to continue supporting the UK economy through the current crisis by keeping interest rates at record lows, a tapering of its bond buying programme could be announced today. If not, signs of it been reduced in the future could still be constructive for GBP upside. The UK’s economic reopening remains on track and households savings are record high levels. This pent-up demand is forecast to be unleashed and drive inflation higher, but unless it’s sustained, policy may remain relatively loose. Meanwhile, new economic projections will also be published by the BOE with expectations for growth and possibly inflation to be revised higher given the successful UK vaccine programme allowing the UK economy to gradually reopen.

• A hawkish BOE today could send GBP/USD through the $1.40 handle today and GBP/EUR above the €1.16 mark. Bear in mind, that both the CAD and NOK are the best performing major currencies year-to-date largely due to their central banks’ hawkish outlook and tightening signals.


Keep an eye on Scottish election result

The British Pound’s political risk premium might creep up if the Scottish National Party (SNP) win an outright majority at the Scottish parliamentary elections today. Such an outcome would likely trigger vigorous lobbying for a new independence referendum to be held in the future.

The opinion polls suggest the SNP will win a fourth term despite a fall in support. As a result, winning an outright majority is far from certain. Moreover, by law, Scotland requires the permission of the UK government to hold an independence referendum, which would prove difficult if the SNP failed to win a majority. However, if there is a majority of pro-independence parties, including the Greens, who back another referendum, then the pressure on the UK government to allow another poll will build.

• Sterling volatility might not be too explosive today given the timeline of a potential referendum, but the result will be of great importance for the future of the UK’s economic landscape and thus the value of the pound.


Risk off flips to risk on

The risk averse market mood didn’t last long as global stock indices charged higher yesterday and US stock futures are holding near record highs this morning. Riskier currencies are on the rise this morning too, whilst safe haven assets are weaker. The US dollar is on the backfoot, with EUR/USD reclaiming the $1.20 threshold.

The dollar had been marching higher ahead of Friday’s key jobs report, but amidst a mixed set of US data this week, the world’s reserve currency has slipped back from 2-week peaks. US labour market conditions are of great importance given the Federal Reserve is paying more attention to full employment as opposed to higher inflation when deciding to tighten monetary policy. Yesterday’s ADP private payroll report revealed the highest increase in jobs since September – adding to optimism that the jobs market recovery is stabilising.

• Risk appetite may be quelled again though given the acceleration in Covid-19 cases in India threatening to spread across other nations. Political uncertainty is also heating up, with tensions building in Jersey as the UK sent Navy patrol ships to a French fisherman blockade. EU-China tensions are also souring with the EU refusing to sign an investment deal with the world’s second largest economy.

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