BOE “Super Thursday” and GBP Trading

Posted by SM-INVEST -
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GBP traders can expect some fireworks as we head into ‘Super Thursday’. The Bank of England (BoE) will announce its interest rate decision at 7.45 am EST. A press conference with BoE’s Governor Mark Carney will follow shortly after. Traders can also expect an update to economic forecasts.

Forecast Changes

Market watchers expect the Monetary Policy Committee (MPC) to revise its 2020 growth forecast up from the current 1.3%. The revision is despite a likely weaker fourth quarter of 2019 due to higher market rates. However, with repriced rates, a stronger GBP and lower oil, markets expect inflation to be lower. This is despite robust pay and a modest pick-up in growth.

BOE November’s Decision

Markets expect the BoE to remain on hold for now. For the MPC, there seems little reason for action or strong guidance at the moment. A 9-0 vote for rates to stay on hold is the expectation. Inflation could be below the target through to 2020. Growth might hold below trend until political and Brexit uncertainty has been resolved. All this implies no pressure for near-term tightening.

GBP

Waiting for Direction

More generally, the policy stance will likely depend on December 12th elections. This will determine government policy and the way forward on Brexit. In particular, markets expect opposite reactions in different Brexit outcomes. In a no-deal Brexit, look for a 50bps of cuts. Whereas in an orderly resolution, deal or remain, markets expect growth to rebound. Also, the MPC might have to reactivate its previous policy of gradual and limited tightening. Given these opposed reactions, the MPC will wait to know which path the UK is on before acting.

Base Case

It now appears a no-deal outcome is unlikely since both main parties prefer an alternative way forward. As a result, markets are starting to pencil in a second-half 2020 hike. Under a Conservative government seeking to implement the current deal by January 31, this might point to an August hike. Under a ‘remain alliance’ government, which organized a second referendum, would imply a more extended period of uncertainty, this might point to a November hike.

The Voters

Saunders, previously a hawk, suggests that the MPC may have to cut rates in a scenario of extended Brexit uncertainty. Ramsden, previously a dove, now highlights inflationary risks from the tight employment market, and lower potential growth. Pending direction from the election, the MPC members are thought to remain clustered around a neutral position. They could also highlight downside risks from trade tensions and Brexit and upside risks from an orderly resolution of Brexit.

Technical Takeaway

GBP

GBPUSD continues to find support above 1.2850 bulls will be targeting a test of offers and stops above 1.30 again, a close above 1.3050 initial range resistance, would inject further upside momentum, emboldening bullish spirits, to make a run for primary range resistance sited at 1.32. At this juncture, only a close below the range pivot at 1.2750 would delay the upside objectives and open a deeper corrective phase, with a test of initial range support back towards 1.2580. Only a failure below 1.2540 would cause concern to the bullish bias.

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