BoE likely to hold policy amid Brexit deal hopes

Two down, two to go. After the US Federal Reserve held its policy unchanged last night, it was a similar move by the Swiss National Bank as it also maintained its expansionary monetary policy stance, with the latter re-iterating that in light of the highly valued Swiss franc, it remains willing to intervene more strongly. The Bank of England is up next at 12:00 GMT, followed by the Bank of Japan on Friday. Things will then die down until January, although we will still have some potentially market-moving data to look forward to from today until the middle of next week.
 
Ahead of the above BoE and BoJ policy meetings, risk remains firmly on the table following the Fed’s dovish remarks and as investors welcome the progress on stimulus talks in the US and the apparent progress in Brexit talks on this side of the Atlantic. Meanwhile, the fact that the European governments are accelerating the rollout of a Covid vaccine before Christmas is also helping to boost sentiment, as this could potentially mean a quicker return to normalcy than expected.
 
The Bank of England will be keeping a close eye on the Brexit negotiations, like most of us in this industry. Last week, there was a greater possibility that the central bank was going to introduce fresh measures had the two sides agreed to a no-deal exit. But as the deadline was extended and negotiations are now going to go to the wire, the BoE will mostly likely refrain from taking any actions at its meeting today. Instead, it will probably tell us that it pans to provide more support in a potential emerging meeting should the UK exit the EU without a deal before the year is out. A no-deal exit will likely cause severe economic damage to the UK, which is why the BoE will have to provide it as much support as it will need. So be prepared for a potential ramping up of QE purchases in the event of a confirmed no-deal exit in the weeks ahead. However, if the two sides agree on a deal then the BoE will probably steer clear of providing further stimulus.
 
EUR/GBP head and shoulders
 
As sterling’s bullish momentum gathers pace, it is worth keeping an eye on pound crosses such as the EUR/GBP. This pair is in the process of forming a head and shoulders reversal pattern:


Source: ThinkMarkets and TradingView.com

The EUR/GBP needs to break below key support and the 200-day average at around 0.9000 on a daily closing basis to tip the balance firmly in the bear’s favour. If that happens then I would expect rates to go on and break the neckline of the H&S pattern at 0.8866 next.