British Pound Slides, Mario Draghi to Attempt a Coalition

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Principal Points

• Sterling depreciates, BoE decision later today
• Upbeat UK data does little for the pound
• Ex-ECB Chief Mario Draghi accepts a mandate

The Great British pound has halted its ascend for a second straight day on Thursday ahead of the BoE interest rate decision. The sterling remains near the intraday lows around 1.3580 to 1.3620 against the US dollar as market participants are waiting to hear from the Central Bank’s Governor Andrew Bailey. Traders and investors are not expecting any new incentives but rather a focus on keeping the current policies unchanged and maintaining affordable loans.

The GBP/USD rally seems to be exhausted this week as the pair has turned negative since it reached a three-year top at the end of January. The pair went as high as 1.3750 before it pulled back in a move that could mark the first correction for the medium-term bullish trend that started on Sep 23. For the past few months, the Sterling has been largely favored by investors. Even at the height of the Brexit negotiation process, the market kept pushing the British currency higher.

The continued drop today follows a set of UK data released on Wednesday. Composite PMI and Services PMI data is better than expected, at 41.2 and 39.5, respectively, beating the consensus of 40.6 and 38.8. The less-than-expected contraction in January, according to the upbeat numbers, left the Sterling unimpressed as bears continued to dominate the currency. Additionally, the US dollar has been gaining strength across the currency market, which put more pressure on the downside for the GBPUSD.

Hope May Be on the Horizon for the UK

As the UK experiences its third lockdown, 10 million people have been vaccinated, according to officials. The milestone indicates that the UK remains on track to meet its goal of 15 million people vaccinated by Feb 15. Prime Minister Boris Johnson, however, warns that the rate of infections is still high and easing of restrictions could be considered approximately three weeks after that date. During a public appearance yesterday, Mr. Johnson stated that he is “very hopeful” that schools will re-open in the first half of March as the country gradually relaxes the measures. Britain’s vaccination program is so far the most advanced in Europe.

Elsewhere in Europe, ex-ECB Chief Mario Draghi accepted a mandate to form Italy’s next government. The former president of the European Central Bank will have to form a parliamentary majority or the country would have to face new elections. As the Italian government collapsed last week, Mario Draghi accepted a request from Italy’s president, Sergio Mattarella, to try to form a national unity government. “I thank the president of the Republic for the trust he has granted me. It is a difficult moment,” said Mr. Draghi in a speech on Wednesday. In his remarks, he addressed the main challenges that Italy faces now, namely, defeating the pandemic, accelerating the vaccination program, and “relaunching the country”.

Mr. Draghi will now begin consultations with parties from the Italian parliament in an attempt to create a majority. He may even need to reach out to old adversaries if he wants to become prime minister. He is expected to look to the anti-migrant League party leader, Matteo Salvini for support. Mr. Salvini has called for new elections but has not yet completely ruled out support for a government led by Mario Draghi.