Today’s rate decision from the BoE had economists and traders split, and as it turned the Bank’s Monetary Policy Committee were also split, voting 7-2 to keep rates unchanged and 6-3 to keep QE unchanged. The pound slumped as clearly some people were pricing-in a small interest rate hike, which partly explains why we saw a sharp reaction in the pound.
Prior to the BoE’s decision, analysts and the markets were in disagreement about what the central bank’s rate-setters will decide on. Analyst expectations had pointed to a 7-2 split in favour of leaving the rates unchanged. However, market pricing had suggested a strong probability of a 15-basis point hike. As the markets got it wrong, the pound fell in immediate reaction.
What do the decisions from BoE and Fed mean for GBP/USD?
Although the pound slumped in initial reaction to the BoE’s surprise decision, it’s weakness could be short-lived as the BoE says it will be necessary to raise rates "over coming months" if data, especially jobs, is in line with forecasts. Estimates of GDP were cut for 2021 and 2022 to 7 and 5 percent respectively, owing to ongoing supply issues. On inflation, the BoE says the pressure would dissipate over time, probably peaking around 5% in April 2022. But for as long as the labour market remains strong, the UK central bank will tighten its policy in 2020. This should keep the pound’s losses limited.
The BoE’s decision comes a day after the US Federal Reserve announced it would taper its massive stimulus by $15 billion a month starting in November. Chairman Jerome Powell did stress however that reducing monthly purchases does not mean the Fed will hike rates any time soon. As the move was broadly in line with expectations, perhaps a bit dovish given that there will be flexibility to change the rate of taper as required, the dollar fell, and US stocks hit new record highs. The dollar’s weakness was short-lived against the pound and the euro, with the former slumping on the back of today’s inaction form the BoE.
EUR/GBP could resume lower amid diverging UK-EZ policies
While the EUR/GBP has found support in light of today’s decision by the BoE, the pound’s best bet of a comeback would be against currencies where the central bank is still dovish. For example, the European Central Bank. Yesterday saw ECB President Christine Lagarde renew her pushback against bets for a 2022 rate increase, arguing that conditions for tightening are unlikely to be met. Bank of Spain echoed that view today, saying inflation surge is transitory, which should allow the ECB to keep its expansive monetary policy in place for longer.
Lagarde’s dovish rhetoric has weighed on the euro, while keeping European stocks underpinned. With the BoE likely to tighten its belt in the coming months, the EUR/GBP could resume lower once the dust settles on today’s decision from the BoE.
Source for all charts: ThinkMarkets and TradingView.com
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