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Impending Rate Decision Causes GBP to Rally

Interest Rates and GBP
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February 3, 2016 By: , No Comments

Talking Pounds and Pennies

On Thursday, 4 February 2016, several important economic announcements will be made at 12 noon GMT in the UK. These include the Bank of England interest-rate decision, the Monetary Policy Committee meeting minutes, the Bank of England quantitative easing decision, the Bank of England Monetary Policy Committee vote hike, the Bank of England inflation report and the Bank of England Governor Carney speech. All of these interrelated events and announcements are coming at a crucial time for the global economy. On Wednesday, 16 December 2015 the Fed decided to hike interest rates for the first time since 2006. The 25-basis point rate hike took the interest-rate to 0.50%, effectively enacting a period of quantitative tightening as the US economy rebounds.

This has had a dramatic effect on dollar-denominated commodities (crude oil, gold, copper, iron ore etc.) and has resulted (directly or indirectly) in a sharp contraction of overall economic activity. The China slowdown, USD strength and commodity price rout has rocked global equities markets in a big way. Now, the UK has its hour upon the stage on Thursday when it decides how it wishes to proceed with interest rates. The consensus estimate for the Bank of England interest-rate decision is 0.5% – no change. In terms of quantitative easing, the consensus estimate is £375 billion and in terms of the Monetary Policy Committee vote hike there is a consensus of 1/9.

The GBP/USD Currency Pair

This currency pair was trading at multiweek lows on Monday February 1st 2016, but it managed to post some strong gains for the day. The USD has come under increasing pressure as a result of Japan’s decision (the BoJ) to slash interest rates to -0.1%. The Bank of Japan decided to combat deflation by making it expensive for customers to deposit money into savings accounts. The Bank of Japan wants people to borrow money from banks instead of deposit money into banks. This is all part of a policy of quantitative easing that is designed to stimulate the Japanese economy and accelerate increases to the rate of inflation. However, this policy has had contractionary effects on the Nikkei 225, the Japanese yen and investor confidence in the economy.

More importantly, negative macroeconomic policies tend to have knock-on effects with competing countries, and now the Eurozone may be forced to enact measures to devalue the currency to compete with Japan. There are concerns that the Fed will now hold off on raising interest rates at its meeting in March as a result of the decision taken by the Bank of Japan. It makes precious little sense that the Americans would seek to strengthen their currency when the doves are out in full force across Europe, the UK and Japan. As a result of speculative sentiment, the GBP staged a broad rally against many competing currencies on Monday, such as the Japanese yen and the euro.

The Thursday decision about interest rates is the most important upcoming economic decision for the UK. It will impact heavily on the GBP/USD currency pair, but more importantly is the MPC summary which will be released with the inflation report. Typically what happens is that the Bank of England will mirror the actions of the Federal Reserve Bank. But this time around, given all the uncertainty as a result of China weakness, saturated oversupply in crude oil, iron ore, steel etc. and a slumping global economy – there is a slim likelihood that the Bank of England will move to increase interest rates at this juncture.

Can the GBP/USD Pair Rally?

The doves appear to have the upper hand at the Bank of England at this point, because the realities on the ground are simply too difficult to warrant a rate hike in the United Kingdom. The GBP/USD pair is trading at 6-year lows just above 1.4078. The currency pair is trying to rise, but is meeting stiff resistance. The level of 1.4500 appears to be the resistance level and bearish sentiment will prevail around that point. The next psychological barrier is 1.4000 for the GBP/USD pair. If the downtrend continues, we could be looking at a new resistance level of 1.3600. Presently, the GBP/USD currency pair is trading at 1.43829 with slight bullish sentiment causing a mini-rally in February.

 

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