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In this post, we’ll be trading the EUR/GBP asset using the signals provided by the Tools Trades website and the IQ Option broker. Be sure to stick to the end of the video as I’ll be sharing a special promo code with you.
The British Pound has flatlined against the Euro as the end of the month approaches while continuing to churn familiar territory against the U.S. Dollar, but early May could bring with it a welcome dose of volatility.
May 06 will see a major Bank of England (BoE) decision as well as the Scottish election that might result in a majority for pro-independence parties.
The BoE will deliver its monthly monetary policy decision as well as its quarterly Monetary Policy Report, which makes this meeting a candidate for any notable shifts in policy.
For the British Pound, this is the highlight of the near-term event calendar and could therefore set the tone for the currency in May.
Shaun Osborne, FX Strategist at Scotiabank says with regards to the GBP outlook, "the BoE’s meeting a week from now comes into focus with economists mixed over whether the bank will tee up a reduction in its rate of asset purchases - with some even expecting such a move to be announced next week."
Ahead of the event, we have noted a number of institutions have said the BoE will take the opportunity to 'taper' its quantitative easing program by reducing the number of assets it purchases as part of its policy to provide liquidity to the economy. Tapering is meanwhile seen as a necessary first step towards ultimately raising interest rates.
Such a move by the BoE would come as something of a surprise to markets given that it was only three months ago that the debate centered on whether or not the BoE would cut interest rates to 0% or below.
The shift from a central bank that was potentially considering cutting rates to one that is embarking on a journey to raising rates again has been credited by analysts as being one source of support for the British Pound.
The Pound-to-Euro exchange rate rallied from 1.11 to 1.18 in the first three months of the year on this BoE shift, the Pound-to-Dollar exchange rate rallied to 1.42 from 1.35.
But Sterling has fallen into something of a rut this April and therefore the BoE's looming decision could offer fresh impetus either higher, or lower.
Analysts at Standard Chartered say the BoE won't act anytime soon, even though the economy is witnessing a strong rebound and is on course to only raise interest rates at the end of 2022.
"We think the BoE will still lean towards caution and fall short of any announcements – such as a slowing of quantitative easing (QE) purchases – which could be construed as overly hawkish by the markets," says Christopher Graham, Economist at Standard Chartered.
Should Standard Chartered be correct, and the market was expecting a more 'hawkish' announcement on tapering, then the Pound could come under pressure.
The problem for foreign exchange market participants is it is quite difficult to ascertain where the market stands on the matter.
We know the market is unanimous in expecting interest rates to be kept unchanged and for economic growth forecasts to be upgraded, but on the matter of reducing quantitative easing, there is no clear signal.
Standard Chartered says the BoE will opt to look through rising inflationary pressures, instead opting to maintain caution given concerns over the outlook for the labor market.
"Given the size of the UK’s output gap, the likelihood that unemployment still heads higher later this year as government employment support is withdrawn, and risks associated with new COVID-19 variants, we still expect the BoE to be largely focused on a return to full employment," says Graham.
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