GBP/USD: The Bank of England's Rate Decision Will Determine the Next Move

The Bank of England is expected to leave rates steady on Thursday at 5.00 percent – the lowest since December 2006 – after cutting by 25bps during their last meeting. However, since the Monetary Policy Committee is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement which may leave the market’s reaction to the news somewhat muted.

[B] MAY 8
Bank of England Rate Decision (11:00 GMT; 07:00 EDT)

                                   [B]Expected:                     5.00%[/B]
                                                     
                                   [B]Previous:                      5.00%[/B]

What Are The Markets Facing? [/B]

The Bank of England is expected to leave rates steady on Thursday at 5.00 percent – the lowest since December 2006 – after cutting by 25bps during their last meeting. However, since the Monetary Policy Committee is anticipated to leave rates unchanged, they are unlikely to issue a monetary policy statement which may leave the market’s reaction to the news somewhat muted. Nevertheless, given the fact that the vote for the April rate cut included six in favor of the 25bp reduction, two votes for no change, and one vote for a 50bp cut, it’s clear that there is major disagreement amongst the Committee on what their next move should be. On the one hand, inflation pressures in the UK have not been quite as strong as in the Euro-zone, as CPI surprisingly held steady at an annualized pace of 2.5 percent in March. However, this is still well above the BOE’s 2 percent target as robust energy and food prices prop the index higher. Furthermore, BOE Governor Mervyn King said last week, “It is likely that inflation in the next 12 months will hit 3 percent and possibly higher.” However, King also said that “the Committee have judged that it would not be sensible to raise interest rates significantly at this stage in order to induce a recession to try and keep inflation below 3 percent.” These expectations that inflation pressures will ease in coming months is only part of the reason why dovish MPC members like David Blanchflower continue to vote for aggressive rate cuts. Indeed, the economy is gradually deteriorating as services and manufacturing PMI have eased lower, and conditions are likely to get worse. Nevertheless, inflation hawks will likely win out during this MPC meeting, as the BOE tends to take a slow-and-steady approach when it comes to monetary policy and the MPC has not enacted back-to-back rate cuts since 2001.

Bonds – Long Gilt Futures

Gilts continue to consolidate between 107.50 and 108.50, but the narrowing price action suggests that a breakout may be on the way. There are two factors to watch when it comes to Gilts on Thursday: the Bank of England’s rate decision and risk trends. The BOE is expected to leave rates steady, which could weigh the contract down toward 107.66. On the other hand, if the BOE enacts a surprise rate cut or some piece of news triggers another bout of risk aversion, Gilts could surge toward resistance at 108.53, with crucial resistance above at the 200 SMA at 108.76.


FX – GBP/USD

The GBP/USD pair made a decisive break below critical support at 1.9600/50 on Wednesday and fell nearly 200 points as UK data was weak all around. First, Nationwide’s measure of consumer confidence plunged to 70 from 77, the lowest reading since record-keeping began in May 2004. Meanwhile, industrial production unexpectedly fell 0.5 percent during the month of March, led by weakening output of manufactured goods like cars and electric, gas, and water supply. The news suggests that economic growth in the UK is being held back by not only waning consumer and business spending, but also foreign demand amidst a global slowdown. The news added to speculation that the Bank of England will cut rates on Thursday morning, especially as the minutes from the last Monetary Policy Committee meeting – when the BOE cut rates to 5.00 percent – showed that they are much divided in their stances. Indeed the minutes showed that six members voted for the 25bp cut, two members voted for no change, and one member voted for a 50bp cut. Nevertheless, the BOE tends to take a slow-and-steady approach when it comes to changing monetary policy, and given the upside risks to inflation looming from booming commodity prices, they are very likely to leave rates unchanged. Furthermore, given the recent drop in the British pound ahead of this meeting and mixed speculation on the outcome, the lack of a rate cut could be enough to give the currency a boost from near-term support at 1.95 on the decision. On the other hand, a surprise rate cut could lead GBP/USD to plunge toward the January 22 low of 1.9338.

Visit our recently updated British Pound Currency Room for specific resources geared towards the GBP/USD pair.


Equities – FTSE 100 Index

The FTSE 100 continues to consolidate within a rising wedge, which could have bearish implications for the index as immediate resistance looms above. Furthermore, the Bank of England’s rate decision on Thursday provides substantial event risk, as disappointing UK economic data has sparked some speculation that the Monetary Policy Committee may implement another 25bp reduction. However, the markets are widely expecting the MPC to leave rates steady at 5.00 percent, and the disappointment could lead the FTSE 100 to pull back sharply toward near-term support at the 200 SMA at 6,175.

[B]Written by Terri Belkas, Currency Analyst for DailyFX.com

Contact the author: [/B][email protected]