How will today’s Bank of England meeting impact Sterling?

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7 February 2019


The Pound traded within a fairly narrow range on Wednesday, with investors in a cautious mood ahead of this afternoon’s Bank of England meeting.

ith less than two months to go until the UK is scheduled to formally leave the European Union, Brexit uncertainty has created a big dilemma for policymakers in the UK. Recent PMIs have slowed, business and consumer confidence is low and the fate of the British economy is on a knife edge as the possibility of a ‘no deal’ Brexit remains live. Amid such uncertainty, the BoE is almost certain to hold policy steady and maintain its patient, ‘wait-and-see’ approach.

Today’s meeting could, however, be under extra scrutiny, given the release of the quarterly Inflation Report and press conference from Governor Mark Carney. We expect Carney to reiterate the risks of a disorderly Brexit and hint that interest rates could go in either direction to support the UK economy as policymakers see fit. Looking at recent economic data, namely the latest soft business activity PMIs, we think Carney will strike an overall dovish tone on the state of the UK economy, which could lead to a bout of Sterling weakness today.

With the UK’s future relationship with the EU far from certain, we think the BoE will stand pat on rates for the time being and instead await clarification on any Brexit deal before even considering changes in policy. As we have mentioned on numerous occasions, we think that we could see a UK rate hike at some point in the second half of this year, provided Theresa May delivers a smooth and orderly Brexit.

Aussie Dollar slumps by most in year on dovish RBA

With economic and political news relatively light on the ground in both the US and Europe on Wednesday, the biggest news story in the FX market was perhaps the fallout from the latest Reserve Bank of Australia (RBA) meeting.

The RBA surprised the market by delivering an overwhelmingly dovish assessment of the Australian economy that opens up the possibility of an interest rate cut in the country later this year. Governor Lowe talked up downside risks from abroad while noting recent weak data that has seen a slowdown in retail sales and construction. The Australian Dollar reacted in aggressive fashion, falling by over 1.5% during the course of trading and posting its worst daily performance in over a year.

Such a dovish shift from policymakers is indicative of what we’re witnessing around the globe at the moment, with many central banks either pausing their hike cycle or moving towards rate cuts amid easing inflationary pressures and generally softer global growth.

US Dollar rally continues after strong payrolls report

In the absence of any major news, the EUR/USD rate spent much of trading on Wednesday driven by broader, underlying themes. The pair has spent the last few sessions trending lower following last Friday’s better-than-expected US nonfarm payrolls report.

Recent strength in the currency is somewhat surprising, particularly given recent dovish communications from the Federal Reserve. The Fed suggested in January that it may hold interest rates steady in the US this year, a sharp U-turn from as recently as December. Given its recent unexpected and perhaps unwarranted strength, we think that a bout of US Dollar weakness could be on the cards in the coming weeks, particularly should the FOMC revise lower its ‘dot plot’ at its March meeting.