An increase in the pound's sensitivity to global risk appetite enabled it to temporarily forget about unresolved issues related to Brexit, terrible macro statistics in the UK and expectations of monetary expansion by the Bank of England. However, these bearish advantages will be back on the game in May.
Because of London's demands for full control over coastal waters, as well as because of its rejection of EU restrictions on environmental, labor law and state aid, Brussels believes that negotiations regarding the future relations of the parties have reached an impasse. If they fail to agree before June, this will essentially mean the release of Great Britain from the EU without a deal.
Meanwhile, British PMI indices released on the eve of April indicate that in the second quarter of 2020, the country's economic downturn will be much stronger than ever.
In this regard, additional measures to support the national economy can be expected from the Bank of England and the UK government.
The UK cabinet is expected to expand fiscal stimulus and the BoE to absorb the growing volume of bond issues, will be forced to increase QE.
In March, the regulator announced the launch of a quantitative easing program of £200 billion and since then has purchased assets worth £70 billion. Keeping the same pace of debt acquisitions, the central bank runs the risk of ending QE in June. If the BoE does not increase purchases now, or at least does not hint at such a step in the near future, then the flight of investors from the local bond market will lead to an increase in yield, and an increase in the cost of borrowing will delay the process of recovery of national GDP. Apparently, the BoE will have to go on expanding the program by at least another £200 billion.
A regular meeting of the Bank of England will be held on Thursday, May 7.
In addition to the announcement of the decision on the rate and size of QE, the central bank will publish a report on monetary policy. This document includes various information, including the forecast for national GDP.
The British economy is expected to contract by 7.4% in 2020. In this case, the worst-case scenario assumes a fall of 9.2%. If the BoE report contains even more negative forecasts, then the pound could drop sharply.
"The GBP/USD pair cannot absorb the April high and the 200-day moving average in the area of 1.2643–1.2657. We are still waiting for a top to form. This fact will be confirmed by a decline to the level of 1.2248. Further support is noted at 1.2176, 1.1934 and 1.1884. In the event of a close above 1.2657, the trend will turn bullish again and resistance at 1.2726 will come into play. In the meantime, a breakout of the 1.1884 level and the bears will aim for a long-term upward trend from 1985 to the March low in the 1.1412 level," said Credit Suisse strategists.
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