Nomura: BoE’s Wish For Credibility Can Help GBP Recovery

Financial analysts at global investment bank Nomura believe that the Pound Sterling has experienced the worst and soon enter into recovery mode. They believe this recovery will be fuelled by the Bank of England’s (BoE) wish to retain its credibility on the international market.

BoE is expected to release its latest economic updates on May 10 and Nomura analysts expect a positive ‘Super Thursday‘ to boost the recovery of the pound.

The Pound Sterling has gone through some very rough weeks in recent times. This is exemplified by the fact that the near 100% confidence of the BoE raising rates by 0.25 percent has now dropped significantly to less than 20%. This drop in confidence was caused by the release of some underwhelming economic data and a warning by Governor Carney that the BoE will take this data into account for future decisions.

The Pound-to-Euro exchange rate was at 1.16 in April, but it has weakened to 1.1373 because of the negative data. The Pound-to-Dollar exchange rate was 1.4377 in April but dropped to 1.3552. This decline in pound value indicates that pound’s strength correlates with the interest rate expectations coming from the Bank of England.

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In a statement, Jordan Rochester, a Nomura analyst in London, said

The market reaction over the past few weeks feels rather like this time last year when, just after we changed our BoE call to a very out-of- consensus hike at the August meeting, the short-term run of data disappointments led to caution from the BoE. GBP/USD sold off more than 3% as a result of that inflation report, but the BoE then hiked just three months later and GBP/USD is much higher as a result

Nomura Adopt Bullish Stance

With the May 10 meeting set to take place, Nomura has adopted a bullish stance. Their analysts have pointed out that the BoE was in a similar situation in September 2017, where the BoE wanted to raise rates but market conditions did not favour the raise. The response was to add “coming months” into its statement to boost market expectations of a higher interest rate. This move helped boost the Pound Sterling for some time.

Nomura expects BoE to deliver a balanced statement to ensure that the Bank keeps its credibility in the current market. With the Pound Sterling getting weaker, it puts upward pressures on inflation and the BoE wants to avoid that since it ruins all the good work previously done to rein it in.

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