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The pound has been struggling amid domestic political trouble, toning down of hawkish rhetoric from Bank of England (BoE), a materially strong dollar, uncertainties surrounding the Brexit transition deal between the European Union and the United Kingdom. In addition to that, the economy is still suffering from political uncertainties of a minority government, which is leading Brexit negotiation, one of the most complex in history. Amid these uncertainties, BoE is scheduled to announce interest rate decision at 11:00 GMT.
- Monetary policy is one of the two major directional and volatility risks for the pound with the other being Brexit.
BOE policy and expectation –
- After the referendum last year, the Bank of England (BoE) reduced rates by 25 basis points, introduced additional asset purchases of £60 billion, introduced £10 billion worth of corporate securities purchase, and £100 billion worth of targeted lending scheme, all to be funded via balance sheet expansion.
- With the UK economy performing much better than expected, the Bank of England (BoE) governor Mark Carney has increased rates by 50 basis points.
- However, the BoE toned down its hawkish rhetoric amid Brexit uncertainties and as the economy started slowing down.
Impact –
- With speculation rising over higher interest rates all over the world, today’s decision would add major volatility in the pound based pairs. If another rate hike is hinted, the pound is likely to shoot higher, if not, the market would lead a temporary drop in the pound with focus on numbers of hawks at MPC. If the number increase, it would prove positive for the pound.
- Moreover, the focus for the pound is on the upcoming Brexit negotiations as well as on the uncertainties surrounding the current operating structure of the government, as well as the direction of the dollar. So, without any major change, it is likely to turn out as a non-event.
- The central bank would also release its inflation forecast, which could add volatility to the pound based pairs.
The pound is currently trading at 1.289 against the dollar.
