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British Pound at a Critical Juncture Ahead of BOE Interest Rate Decision
Written by article default Thursday, 04 November 2010 11:16
In several hours we will get an interest rate decisions from the Bank of England, followed shortly thereafter by the European Central Bank’s decision. After the Federal Reserve policy decision on Wednesday that many saw as anti-climatic, it’s hard to get too excited about these forthcoming events, but traders should probably pay attention, for there is the potential for breakouts in some important pairs under certain scenarios.To start, we should note that no movements in interest rates are expected from either of these central banks. The economic recovery in Europe remains choppy just as it is in the United States. It will be awhile before interest rates in the region increase.
On the other hand, there is significant room for a surprise from the Bank of England with regard to its quantitative easing program. The BOE is likely thinking hard about expanding its asset purchases from the current £200 billion ($319 billion) in order to support an economy that is struggling under heavy budget cuts. Indeed, after markets learned of the Fed’s enormous program, any stigma associated with QE is likely gone. Recall that the Bank of Japan initiated its own program totaling ¥5 trillion ($60 billion) only a few weeks ago.
In the minutes to the October meeting the BOE hinted that additional stimulus may be forthcoming. One member remarked that “the accumulated evidence since the Committee had completed its £200 billion programme of asset purchases suggested that further expansion in that programme was now warranted.”
However, other members felt that while “the likelihood that further monetary stimulus would become necessary had increased in recent months, the evidence was not sufficiently compelling to imply that such a course of action was necessary at present.”
The market consensus seems to be strongly leaning toward a scenario of no new stimulus; a Bloomberg survey of economists has 38 out of 40 predicting such an outcome. What tipped the scale for many market observers is the third quarter GDP release from last week which showed a 0.8% quarter-over-quarter increase, double the expectation of 0.4%. Most economists are still predicting that the BOE will eventually increase its QE program, but that it will happen sometime in 2011.
Nevertheless, traders should watch this release closely for we’ve been getting a lot of surprises from central banks recently. The Pound would likely plunge if the UK central bank joined the Fed and BOJ by initiating another round of quantitative easing. Dovish commentary indicating the possibility of such action down the line could weigh on the currency as well.
On the other hand, if the central bank emphasizes the strong GDP report and backs off earlier suggestions of further stimulus, the Pound could soar, reinforcing the technical breakout of GBP/USD above the 1.60 level.
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