The BOE has an important decision to make in the coming month, at its May interest-rate decision where the MPC must decide whether to continue it’s quantitative easing bond purchase program, or to pause it at its current £325 billion. While a strengthening economy – even relatively speaking – would be one reason to pause QE, another impediment could be inflationary pressures which may remain more stubborn than the BOE expected. The UK releases its latest inflation data in the Tuesday European session.

Can the GBP benefit over the EUR based on unwinding of carry trade flows, and the advantage that the UK holds in terms of higher yields? Investors are looking for “safe” assets, but still want to get a decent yield for their money. If we limit the “safe assets” to bonds in the US, Germany, and UK, and compare the 3, we see that the GBP holds a distinct advantage. If an investor wants both yield and safety, UK gilts and therefore the GBP have an advantage. Can that give support to the GBP?

The UK current account report will give insight into the effort by the government to shift the economy from one revolving around domestic consumption to one that is more oriented on industry and exports. The expectation is that the deficit nearly halved from the 3Q reading of -£15.2 billion to -£8.5 billion. That would be a positive for the GBP. If the current account deficit comes in wider than expected, it could work to undermine the GBP as it would imply that the rebalancing needed in the economy is not yet happening.

This will be a key week for the GBP. While the annual budget release and the retail sales point to uneven growth in the economy, the inflation data should show that the BOE has more scope for QE if it is warranted. Therefore the microscope will fall on the BOE Meeting what type of discussion there was about expanding or not expanding the QE bond buying program. If the BOE holds the door open for more QE, the GBP is likely to be pressured, while if it argues that enough has been done, then we may look for the GBP to be supported.