BOE Preview Are we nearing the end of story
Joe Perry May 3, 2021 11:19 AM
With the 875 Billion Pound bond purchase target fast approaching, the BOE is going to have to do something
A long, long, time ago (the fall 2020), there was the Bank of England, who told banks to get ready for negative rates. Then, all of the sudden in January, the BOE said that by telling banks to get ready for negative rates, they didn’t really mean to imply that they were going to actually bring rates into negative territory. While the UK was in lockdown, markets waited to see what the BOE would do next. At the March BOE meeting, the committee voted to leave rates unchanged at 0.10% and left their bond buying program unchanged at 875 billion Pounds. The BOE meets again on May 6th. Will they do anything this time?
As discussed in the Currency Pair of the Week, since the last BOE Monetary Policy Meeting, the UK has reopened non-essential businesses, outdoor pubs, and restaurants. In less then 2 weeks, more restrictions will be lifted, including those on indoor dining and sporting events. Prime Minister Boris Johnson said he expects all restrictions to be lifted by June 21st. Nearly two-thirds of the population have had at least 1 jab.
Over the course of the last month, the March economic data has been coming in much stronger than expected. The March Claimant Count Change was 10,100 vs 150,000 expected! Inflation data was stronger than February, though as expected. Retail sales were 5.4% vs 1.5% expected! Both Manufacturing and Services Preliminary PMI’s for April were stronger than expect at 60+.
The Problem and Choices
Here’s the main problem: At their current pace of buying, the BOE is going to hit their bond buying target in the fall. That leaves the central bank with 2 choices:
- Increase the target amount, as they did several times in 2020.
- Slow the amount they will purchase each week, which will extend their target until later in the year. In other words, TAPER.
Will the BOE be less dovish or will they indicate that they are not even talking about tapering, as with the Fed and ECB. Some economists are expecting the BOE to do nothing and kick the can to the June meeting. However, many believe that the MPC will announce that they will begin tapering soon, so as not to have to extend the 875 billion Pound target further! An increase in strong economic data and an increase in tapering would most likely result in an increase in the value of the Pound.
Since the last BOE, the GBP/USD has been trading in a range between 1.3674 and 1.4010. 6 weeks after the last meeting, GBP is trading near the top of the range. However, there is strong resistance above between 1.3940 and 1.4000. Will the mention of “tapering” be enough to push GBP through the resistance? Support is lower at Monday’s lows of 1.3801 and then the 38.2% Fibonacci retracement from the early September lows to the February highs, near 1.3636. Will a dovish BOE be enough to push the pair below?
Source: Tradingview, Forex.com
With the 875 Billion Pound bond purchase target fast approaching, the BOE is going to have to do something. We’ll find out on Thursday whether they are going to announce some kind of tapering or wait for more economic data and kick the can down the road to the June meeting.
To be continued…….
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.