The Bank of England (BoE) Rattles GBP Traders
Cable is trading at 1.3135 (October 24, 2017) as analysts continue to go short on sterling. The GBP/USD pair slipped from 1.3193 on Wednesday, October 18 to its current level. While marginal, these declines are part of a dominant short-term trend in the performance of sterling. The 52-week low for the GBP/USD is 1.19952, and the corresponding high as 1.36158. Volatility is expected midweek, as UK GDP figures permeate through markets. The Bank of England is seeking additional information before it decides on interest rates in November.
The deputy governor of the Bank of England, Jon Cunliffe is particularly dovish on rate hikes. He indicated that the prospect of an increase in the bank rate was an open question. According to Cunliffe: ‘… I’m not going to try and anticipate the meeting, but for me the economy has clearly slowed this year…’ During Q1 and Q2 of 2017, the UK economy grew by just 0.3%. This is the slowest growth rate of the UK economy since 2012. However, gross domestic product is forecast to remain unchanged at 0.3% Q-on-Q with Y-on-Y growth of 1.5%. If these forecasts prove true, the BOE is likely to refrain from hiking interest rates until evidence of a recovery permits.
ECB and Monetary Policy Discussions
On Thursday, October 26, 2017, the European Central Bank will meet to discuss monetary policy. While the ECB is not expected to increase interest rates anytime soon, it may provide a blueprint for a tempering of quantitative easing. These moves will come into play in 2018. The Eurozone is displaying strong growth prospects, and IHS Markit Purchasing Managers Index data also indicates that production capacity is increasing. The Governing Council of the Eurozone will likely view the current economic data positively and take active steps towards reducing corporate and personal bond purchases, effective in 2018. Wells Fargo believes that the ECB will cease bond purchases in 2018 and gradually increase interest rates across Europe.
For traders, it will be important to follow the words of BoE, ECB and Fed officials in coming days. Any move towards ending QE policies in Europe will strengthen the EUR, and likely weaken the USD and GBP accordingly. In the UK, any movement towards increasing interest rates will invariably boost GBP demand and result in a selloff of USD. Any delays or indications thereof of accommodative monetary policy will weaken the GBP. For the UK, the central issue remains Brexit negotiations and how they are progressing with PM May and Brexit secretary David Davis at the helm.
Brexit Negotiations Remain Unclear
The UK remains mum on how much money it will pay to the EU for the Brexit to be concluded. There are also pension repayments that need to be made – another sticking point. The European Union will not commence trade discussions with the UK until a monetary figure is announced. The UK doesn’t want to weaken its negotiating position by agreeing to pay a certain sum, or setting a precedent before it has any indication about how trade talks will continue. The UK Councillor of the Exchequer, Philip Hammond is hopeful that a tentative agreement will be reached with the EU before the end of 2017.
For sterling traders, the writing is on the wall. It does not appear likely that any breakthrough in Brexit negotiations is possible. In the absence of such an agreement, the GBP will remain on the back foot and the prospect of a Hard Brexit may come to pass.
What do you feel is likely to happen with the GBP/USD currency pair before the end of 2017? Will a stronger EUR apply pressure to the GBP? What is the ideal exchange rate?
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About Brett Chatz
Brett Chatz is a graduate of the University of South Africa, and holds a Bachelor of Commerce degree, with Economics and Strategic management as his major subjects. Nowadays Brett contributes from his vast expertise in online trading for iForexTrader.co.uk.