What matters the most today is the bank's committee vote and their outlook for inflation and growth in amidst of Brexit chaos
Traders are gearing for an exciting and busy Super Thursday, this means that the Bank of England will be delivering its monetary policy decision and inflation and growth forecast. The current benchmark interest rate sits at 0.75 percent and the decision by the bank is due at noon in London. Remember, Mark Carney, the governor of the Bank of England, has kept the monetary policy unchanged for a long period of time. This is the first meeting since the prime minister Theresa May, secured an extension of Brexit.
Although it is a matter of shame that despite lengthy 2 years Brexit negotiation, the prime minister still doesn't have any deal which is backed by her own party, never mind the opposition. During this time, the bank has been working mostly on the scenario of a smooth Brexit. Given that Brexit deadline is extended until October, the bank will have to come up with new predictions in order to factor in this delay.
So far, the economic data hasn't fallen off the cliff. I am not saying that the economic data is very healthy, but we cannot ignore the fact that we have seen more upside surprises during Q 1. Despite this, it is likely that the overall approach adopted by the Bank of England could be cautious because the continued uncertainty is burdensome for the economy. But, the bank may actually raise its growth and inflation forecast for 2019 because of better than expected economic data. This is positive for the sentiment but not be a big deal from the market perspective.
The focus is going to be on the status quo. What is widely expected in the market is that the vote may shift from 9-0 to 8-1. The person who is likely to be of a different mind frame is Michael Saunders, the committee's most hawkish member. This would be considered as a hawkish message, but this doesn't mean an actual interest rate hike. In my opinion, it is unlikely that the governor, Mark Carney will do anything before he leaves. This means no rate hike until 2020.
The question is how sterling will react on the back of this event?
Well, if the status quo is maintained then it means no significant moves for sterling. However, if we see a change of mind among the committee members, speculators are likely to get off from the sidelines, they may actually push the styling above the 1.31 mark against the dollar. The 50-day moving average on a daily chart is trading at 1.3105, it is also acting as a resistance. The price is trading above its 100 and 200-day moving averages which is a bullish sign. Thus, the overall read from the technical analysis is likely to be to the outside. The near term resistance is sitting at 1.3133 and a break of that would open the room towards the next resistance which is at 1.3191. Similarly, the immediate support is at 1.2926 and a break of this may open the door towards the next level which is 1.2876.
In terms of pound dollar 2-month risk reversal we have seen a huge search during the month of April where it has moved from -2.5 all the way to -0.5. The CFTC data shows bat there is an increase of 5.7 percent in the bullish sentiment in total. this indicates that a move to the upside is what expected by the smart money.