Pound rallies after Bank of England pumps extra cash into the economy, just as a national lockdown starts

• The pound headed for its biggest weekly gain in six weeks, despite the Bank of England cutting its economic forecasts and a second major lockdown.
• The government will also extend its furlough scheme through to March, as a large percentage of the UK population wakes up to another lockdown that will strip more off economic growth than the BoE thought.
• Another boost came from the broad weakness in the dollar, as investors cashed in on Wednesday's across-the-board rally after the election.

The pound rallied on Thursday, heading for its biggest weekly gain since late September, despite the implementation of a lockdown in much of UK, as investors took solace in the Bank of England's plans to pump more cash into the economy.

The BoE kept interest rates unchanged, but said it would expand its bond-buying by slightly more than expected as it struggles to ward off more economic damage from the coronavirus pandemic, with weeks to go until the United Kingdom fully leaves the European Union.

Sterling rallied after the BoE's decision and was last up 0.8% around $1.3091, making it the second-best performing G7 currency of the day so far after the euro, which rose almost 1% against the dollar. Gilt yields briefly fell, in response to the prospect of more economic weakness, but later backtracked.

"We take this as a strong indication that currency investors remain focused on global drivers over local factors with all eyes still on the US election outcome," Ned Rumpeltin, head of European currency strategy at Toronto-Dominion Bank said.

"That said, the UK does have a few key things to watch on the immediate horizon. We are looking for a sizable fiscal package from the Chancellor today which may be helping to boost sentiment toward the pound," he added.

Rishi Sunak, the Chancellor of the Exchequer - Britain's finance minister -, told UK lawmakers on Thursday extend the country's furlough scheme through to March, to prevent mass-unemployment when non-essential businesses close around England in a second lockdown this year.

The government will continue to pay 80% of the wages of those who remain employed but who cannot work, he said.

There are other risks on the horizon that could rattle confidence in the pound, analysts said.

"The UK does have a few key things to watch on the immediate horizon. We are looking for a sizable fiscal package from the Chancellor today which may be helping to boost sentiment toward the pound," Rumpletin said.

"We also remain constructive on the Brexit front. Negotiations hit a wall this week, but we are looking for the leaders from both sides to move the process forward again in the next few days," he added.

Adding to the strength in sterling was the broad weakness in the dollar, as investors took profit on the US currency's stellar rallies against both G7 and emerging-market rates the previous day. The dollar index was last down 0.91%, trading at 92.5530.

"While the outcome of the US presidential election remains uncertain, the markets have concluded that the dollar is the real loser," said Valentin Marinov, head of G10 currency strategy at Credit Agricole.

"The combination of a divided congress and a (potential) Democrat president is seen as 'the best of two worlds': less protectionism abroad and no increase in regulation or corporate taxes at home. The latter seems to offset to a degree the negative impact of the less aggressive than hoped fiscal stimulus that is now expected to follow after the election. This is boosting risk and weighing on the USD, especially vs currencies that can benefit from a further pick up in global trade and growth from here - e.g. EUR and CNY as well as their proxies," he added.