Sterling hovered around the $1.39 mark as traders waited for a Bank of England policy meeting later on Thursday where the central bank will say the British economy is rebounding strongly and that it might begin to slow its bond-buying.
The BoE will announce its latest economic forecasts at 1100 GMT when it is expected to keep its benchmark interest rate and its bond-buying programme unchanged, for now, but could announce that it is slowing the pace at which its buys bonds.
Slowing that pace would represent a moderate step towards the moment when the BoE begins to reverse its emergency stimulus. Most economists polled by Reuters last month pencilled in a first rate hike only in 2023.
Britain’s relatively successful COVID-19 vaccine rollout has allowed the economy to reopen faster than many had expected and with consumers and businesses stocked up on cash saved during the pandemic the BoE will point to a much stronger economic recovery this year than it had previously anticipated.
“The BoE should deliver a series of upgrades to its economic forecasts today and this encouraging outlook suggests the Bank may announce QE (quantitative easing) tapering. While this should come as no surprise, on the margin it should be GBP positive, particularly after the tough month of April for sterling,” ING analysts said in a note.
Some analysts reckon the BoE will follow the U.S. Federal Reserve and back away from too much talk of tapering its stimulus extended last year.
“It’s sure that the taper talk will need to happen at some point in the foreseeable future, but some British policymakers will ask for patience until we see the British economic recovery on the right track before taking concrete action,” said Swissquote senior analyst Ipek Ozkardeskaya.
Thursday, dubbed ‘Super Thursday’, is a big electoral day for Britain, with voting in the Scottish and Welsh devolved parliaments as well as a clutch of local English council seats and a closely-watched parliamentary by-election in England’s north east.
Of most interest to sterling traders is the Scottish election, where the pro-independence ruling Scottish National Party has vowed to call another referendum on breaking away from the United Kingdom if it wins a majority of seats.
Polls put the SNP significantly ahead of rivals but it could fall short of an outright majority.
Any referendum is likely to be years away, however, as British Prime Minister Boris Johnson has pledged to block any vote, and most currency analysts say the impact on the pound is unlikely to be meaningful for some time.
Sterling was down marginally by 0815 GMT at $1.3905 after 0.2% versus the euro at 86.495 pence.
After rallying in the first quarter to a nearly three-year high above $1.42, the pound has since struggled but remains up 1.8% versus the dollar in 2021.
(Reporting by Tommy Wilkes Editing by Gareth Jones)