Top Story

BOE recap: Beaten-down GBP/USD grows hawkish wings

As is often the case with central bank meetings in the era of communication-as-a-policy-tool, the Bank of England’s “decision” (read: no change) on interest rates was already telegraphed well in advance. But for the always forward-looking markets, there was still plenty to digest from this morning’s BOE statement.

By far the most notable development was BOE Chief Economist Andy Haldane’s decision to dissent in favor of an immediate interest rate increase. Haldane joins MPC members McCafferty and Saunders in voting for an interest rate increase, bringing the vote to a relatively balanced 6-3. For the dissenters, not only were “the benefits of waiting for additional information limited,” but they felt that there may be upside risks to the MPC’s May Inflation Report forecasts for earnings growth and unit wage costs, a possibility we highlighted in yesterday’s BOE Preview report.

The other major hawkish development was the news that the central bank now plans to start reducing the size of its balance sheet when interest rates reach 1.5%, down from the previous guidance of 2.0%. In other words, the BOE now plans to begin unwinding its bond holdings earlier. Rounding out the hawkish interpretation of the meeting, the minutes seemed to view April’s slowdown in manufacturing as temporary. In the wake of the release, the market-implied probability of an interest rate increase in August rose from about 50% to closer to 70%, driving pound sterling higher along with it.

Of course, there are still developments that could impede rate hikes moving forward. The proverbial “elephant in the room,” as ever, is the ongoing Brexit negotiations; it’s worth noting that the BOE’s forecasts assume a “smooth” transition to a new Brexit relationship, so a lack of progress toward that goal could prompt the MPC to stand pat. Interestingly, Ian McCafferty’s term on the MPC expires at the end of August, so that could shift the balance of the central bank’s voters after the next meeting, depending on his replacement.

As we noted earlier, pound sterling has caught a strong big on the back of the BOE decision. As of writing, GBP/USD showing a possible “bullish engulfing” candle on the day, signaling a big shift from selling to buying pressure. As we noted yesterday, the hawkish meeting could prompt a bounce toward 1.3300 or 1.3400 next, though we’d caution traders that the recent downtrend remains the dominant feature of the GBP/USD chart.

GBP/USD Daily Chart

Source: TradingView, FOREX.com


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.