Forex Market: GBP/USD touches a fresh five-month high after Bank of England’s less pessimistic outlook for UK economy

GBP/USD extended gains from the prior trading day and hit a fresh five-month high during mid-European session on Thursday, after Bank of England revealed a less pessimistic outlook about UK’s pandemic-ravaged economy.

After an unanimous vote, BoE’s Monetary Policy Committee left the key bank rate at a record low level of 0.10% at its meeting earlier Thursday, in line with market expectations. Policy makers also voted unanimously in favor of continuing the bank’s existing UK government bond and sterling non-financial investment-grade corporate bond purchase programmes, as they maintained the target for the total purchases at GBP 745 billion.

The central bank said that the initial impact from coronavirus-related lockdown measures had not been as severe as it had forecast in May, but still, the economy would probably not reach its size from before the pandemic until the end of 2021. BoE had earlier forecast a recovery by the second half of 2021.

Policy makers were now also more optimistic about UK’s unemployment outlook than they had been in May. They project a rise in the country’s unemployment rate to 7.5% at the end of 2020 before a gradual decrease.

“Overall, the BoE’s economic outlook is relatively less dovish than expected and the absence of a strong signal in favour of negative rates opens the door for further pound gains in the near-term,” MUFG analysts wrote in an investor note.

The Pound has benefited from recent US Dollar weakness and has now recouped almost the entire loss it sustained after the selloff in March and April.

“Cable may have some more upside on the back of a powerful dollar bear-trend – especially if the 1.3200 level breaks,” Chris Turner, global head of markets at ING, said.

As of 10:59 GMT on Thursday GBP/USD was edging up 0.43% to trade at 1.3171, after earlier touching an intraday high of 1.3186, or a level not seen since March 9th (1.3201). The major pair advanced 5.52% in July, while marking a second straight month of gains and its best monthly performance since May 2009. The pair has gained another 0.67% so far this week.

In terms of economic calendar, at 12:30 GMT today the US Labor Department will report on jobless claims. The number of people in the country, who filed for unemployment assistance for the first time during the business week ended July 31st, probably eased to 1,415,000, according to market expectations, from 1,434,000 in the preceding week.

Data for the week ended July 24th brought the total number of claims reported since March 21st to 54.1 million.

Bond Yield Spread

The spread between 2-year US and 2-year UK bond yields, which reflects the flow of funds in a short term, equaled 16.7 basis points (0.167%) as of 10:15 GMT on Thursday, down from 17.4 basis points on August 5th.

Daily Pivot Levels (traditional method of calculation)

Central Pivot – 1.3111
R1 – 1.3165
R2 – 1.3215
R3 – 1.3269
R4 – 1.3323

S1 – 1.3061
S2 – 1.3007
S3 – 1.2957
S4 – 1.2906