Impact of Bank of England policy on pound exchange rate 2024

The Bank of England, or BoE, is the central bank of the United Kingdom. Through its monetary tools and policy decisions, it can shape the pound exchange rate and influence international trade. Many traders wonder how the BoE will affect the value of the British pound in 2024 since it can affect the forex market and their positions. So, let’s take a closer look at what you should look out for.

The role of the Bank of England

The BoE has a very expansive role beyond domestic regulation for the United Kingdom. It also affects global trade relations, and its policies are essential for carrying trade. When engaging in forex trading, you’ll likely have to analyse BoE decisions because their policies can lead to fluctuations in the pound’s valuations and how it interacts with other currencies.

Through different monetary policy methods like forward guidance, interest rate adjustments, and quantitative easing, the BoE directly influences the pound’s exchange rate. With a higher interest rate, there is an increased demand for the GBP, strengthening its value.

When connecting the BoE to forex trading, you should know that its influence is mainly through the management of interest rates. When it adjusts the official bank rate, it affects the attractiveness of the pound to traders.

Pound dependence on Bank of England policies

Many traders are already eyeing the BoE’s policies in 2024 because of the pound’s performance against the backdrop of recession and inflation concerns. Before the March 21^st, 2024 meeting of the BoE, the GBP/USD dipped following a five-day decline.

The British pound had a notable decline against the US dollar, with five consecutive days of losses, which caused many traders to monitor the central bank’s decisions. Many traders were waiting for the Bank of England’s meeting on March 21^st.

However, there was also the possibility that the value of the pound would go down or up, depending on the outcome of the meeting. The upcoming meeting was a pivotal moment, as it could move in either direction. Eventually, after the meeting, the BoE decided to retain the interest rate at 5.25%.

When the BoE showed signs of potential rate cuts after the meeting, the GBP/USD fell below 1.2700, over 100 pips. This movement reflected the change in trader sentiment and market dynamics caused by the BoE policies and economic forecasts. Many scrutinised the BoE’s decision to maintain interest rates above 5% despite economic pressures.

Furthermore, recent comments from the BoE have hinted at future rate cuts, which have affected trader sentiment and led to the pound’s downward trend. Despite the recent decline, the British pound has remained relatively strong in 2024 compared to its poor performance in 2023.

Ways the Bank of England will shape the pound and international trade in 2024

The Bank of England’s monetary policies will influence the pound exchange rate and international trade in 2024.

Interest rates and inflation

The Monetary Policy Committee at the BoE uses interest rates to manage inflation. Higher interest rates reduce inflation by encouraging saving and making borrowing more difficult. Due to the increasing rate of inflation and prices in the UK, the BoE has been raising its interest rates.

This has helped UK inflation fall from 11% in 2022 to 4% at the end of 2023. However, the BoE’s aim is 2%, so it is expected to continue increasing its interest rates. While this is meant to make the pound more valuable, trader sentiments and market dynamics must also be considered.

Exchange rate

The BoE’s decisions also directly affect the pound’s exchange rate against other currencies, like the GBP/USD rate. The central bank is focused on reducing its bank rate from 5.25% to 3.25% after a specific period. The BoE will also affect the sterling exchange rate index. A higher one means a more valuable Pound.

Market reactions

Many traders are watching the outcome of BoE meetings and their policies. This causes the central bank to have an immediate impact on the pound. When it holds the interest rate steady, the value of the Pound may strengthen.

However, as you can see from the March example, when the BoE hints at rate cuts, the pound may weaken. Based on the BoE’s statements, traders adjust their currency positions.

Trade implications

Undoubtedly, the BoE’s decisions affect international trade due to the pound’s value. A stronger pound reduces the cost of imported goods and services, which benefits imports. On the other hand, exporters benefit from a weaker pound by making their products more competitive. So, the exchange rate directly affects trade balances and forex investment decisions.

Watching the BoE policies for trading

The BoE influences the pound exchange rate and international trade dynamics through policy decisions. Market participants, such as forex traders, continue to watch the central bank’s actions and follow its statements because these hold clues about rate changes that could occur in the future.