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Market Update

Sterling dipped against the dollar and euro as some investors braced for a larger-than-expected increase in the Bank of England’s quantitative easing programme to combat the economic fallout of the COVID-19 pandemic.

The BoE, which meets later today, is expected to build up its war-chest for fighting the crisis by announcing an increase of at least 100 billion pounds ($125 billion) in its bond-buying programme.

The British central bank has already spent most of the 200 billion pounds of the firepower it gave itself in March as it soaks up much of the government’s COVID-19 borrowing.

With its key interest rate at just 0.1%, Governor Andrew Bailey has said the BoE will contemplate going below zero for the first time, but the review will take time.

The pound remains defensive ahead of the Bank of England meeting – partly as markets may be bracing themselves for a bigger QE expansion than the 100 billion consensus.

There is a good argument for this – given that a 100 billion expansion would barely last through summer at the current pace of weekly gilt purchases. We would consider a 100 billion QE expansion to be a slightly more hawkish signal than the range of possible outcomes today.

While most economists polled by Reuters expect a 100-billion-pound expansion, some analysts expect more. ING Bank and Nomura for instance, expect an increase of 150 billion.

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