What Market Reaction is Expected with Super Thursday?
The UK Economy Hinges on the BOE
On Thursday, 4 August 2016, the Monetary Policy Committee (MPC) of the Bank of England will announce its interest-rate decision. It is largely expected that rates will be cut 25-basis points to 0.25%. Prior to the June 23 Brexit vote, Mark Carney of the Bank of England promised sweeping measures to save the UK economy given that a technical recession is effectively on the cards. On 14 July 2016, the BOE MPC members voted by a margin of 8:1 to maintain the current interest rate of 0.50%. This vote shocked market participants who were expecting a rate cut at that time. Nonetheless, the Bank of England will likely continue purchasing assets to the tune of £375 billion. The current interest rate of 0.50% is the lowest ever, and the high was 17% back in 1979.
Presently, the consensus forecast is 0.25% for Super Thursday when the BOE makes it interest-rate decision. In terms of quantitative easing, asset purchases will likely continue at the present level of £375 billion. The GBP/USD currency pair has appreciated sharply in recent days, and is now trading at 1.33576, after having broken through the critical 1.32 ceiling. Presently, the speculative sentiment index indicates a 54% short position on the currency pair which remains rather bearish. The current SSI figure is -1.1847, significantly lower than 1.29 a week ago. On the flipside, the FTSE 100 index has been taking a bit of a pounding with a stronger GBP and news of a mass selloff in June and July. The UK all share index is down 0.73%, or 48.55 points at 6,645.40.
Panic-Selling Causes FTSE 100 Index to Plunge
The FTSE 100 index moved sharply lower as investors withdrew £3.5 billion from a wide range of British investment funds after the Brexit vote. Now, UK construction appears to be shrinking at its fastest pace in over 7 years. The 1% gain in the GBP versus the USD is notable. The emotional reaction to the Brexit decision is now starting to filter through markets as the lag effect catches up with reality. There was a large degree of panic selling amounting to £3.5 billion as investors scrambled to cash out their portfolios ahead of an uncertain future with Europe. This marks the largest withdrawal of funds – capital flight – from investment funds in any month ever. The data was provided by Investment Association and it indicates that this selloff was at least 3 times greater than the January spike.
Investors have been cautioned about this selloff, given that the UK stock market has actually rallied substantially since the Brexit vote. The majority of sales took place in the 55+ age group since the UK now allows these folks to access their pension funds. Funds to take the biggest hit in the UK include property funds, with £1.4 billion withdrawn from that sector. Equity saw approximately £2.8 billion withdrawn and £464 million was withdrawn from ISAS during June.
Is the Bank of England Flying Blind?
Now, even more pressure is being brought to bear on the Bank of England and its governor, Mark Carney. The so-called Super Thursday is among the most anticipated meetings of the BOE. Many spread bettors are cautioning that this would be a rather early time to implement a rate cut, since there is not enough available economic data to warrant such an important decision. Recall that the economic fallout from the Brexit will only become available in August and September, possibly later. For now, it appears as if the GBP/USD currency pair is holding steady. The pair is rallying off the back of dollar weakness and a comeback among emerging market currencies such as the South African rand. If the BOE disappoints traders, movements could go sharply higher.
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for spreadbettingreview.co.uk.