U.K. and U.S. monetary policies looks set to diverge, sending sterling falling against the dollar, according to a new research note from HSBC.
It comes after the Bank of England (BoE) surprised markets by issuing a statement giving guidance on future policy, after its July 4 monetary policy decision. The announcement led to a sharp drop in sterling, which fell to just above 1.50 against the dollar from 1.52 on the news. On Friday, sterling had rebounded to trade at 1.5258.
"Cable [sterling versus the dollar] is going down: how's that for forward guidance?" David Bloom, HSBC's global head of FX research, said in a note on Friday.
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Bloom argued the BoE would likely continue to issue forward guidance under its new governor Mark Carney, and could adopt other policy tools to boost stimulus. This would be in contrast to the U.S., where Federal Reserve Ben Bernanke has repeatedly discussed paring back the Fed's massive monetary stimulus program.
"U.K. monetary policy is seeking to distance itself from the less dovish tone emanating from the U.S. Fed," Bloom wrote. "Such a divergence in policy is a rare event in U.K.-U.S. economic history, and has been associated with GBP-USD weakness in the past."
For example, when Fed-BoE policy diverged in 2005, with the Fed hiking base rates while markets awaited a BoE rates cut, the sterling fell by around 10 percent against the dollar.