Forex Flash: BoE follows Fed pattern – UBS

FXstreet.com (Barcelona) - With the (likely) introduction of 'forward guidance' and 'intermediate thresholds' to anchor policy as much as possible, the stage is set for low rates and/or QE to remain in place until unemployment and inflation reach levels consistent with 'escape velocity' in the UK. According to UBS Research Analyst Geoffrey Yu, “ In essence, the BoE is choosing to do a 'Fed' rather than a 'BoJ'. For sterling, although the immediate risk of policy-driven debasement has been alleviated, we would sell sterling into the post-budget rally as the broader direction for the BoE is towards more flexibility, and in Chancellor Osborne's own words, more 'monetary activism'.”

In addition, the Fed's impact on the dollar has shown that so long as BoE policy remains anchored by guidance and targets, it will be hard for sterling to compete with other currencies whose policy measures are less aggressive, at least until the domestic economy has recovered to a level where the central bank can start to revisit normalization and stimulus withdrawal. This is a stage the Fed will likely reach later this year.

However, as Chancellor Osborne stated today, the OBR estimates growth in the United Kingdom to only reach 0.6% YoY in 2013 (subject to ongoing external risks, UBS estimate: 0.8% YoY), while US growth may be close to a full 2 percentage points above that level (UBS 2.3%).