Bank of England keep rates unchanged; Cable forming a base?

Summary:

• Bank of England keep all rates unchanged as expected

• Carney offers little market moving comments in presser

• GBPUSD forming a possible double bottom and set for large daily gain

As was widely expected the Bank of England have voted unanimously to keep the current policy mix in place, with the base rate unchanged at 0.75%. The overall tone of the accompanying statement was fairly mixed and as thus, there’s been a fairly muted market reaction with the pound remaining close to its highest levels of the day. The actual release showed:

• Official bank rate: 0.75% vs 0.75% exp. 0.75% prior.

• Voting pattern: 9-0

• Asset purchases: £435B vs £435B exp. £435B prior.

The message is in keeping with prior communications by and large, with the bank stating that they foresee ongoing tightening of monetary policy if the economy grows as forecast, but checking this with the caveat that increase will likely be at a gradual pace and to a limited extent. The growth forecasts for this year and next were revised lower by 0.1%, in what could be seen as a negative sign but on balance the report could be considered mildly positive. Stating that the output gap has closed and that this may mean a possible faster pace of hikes post-Brexit is arguably the most hawkish comment and pound bulls may look to focus in on this.

The pound is gaining on balance on the day after the latest BOE decision, with the largest gains seen against the US dollar and the Japanese Yen. GBPUSD is actually on course for its largest daily gain since 24th January. Source: xStation  

Carney’s press conference didn’t throw up any major surprised with the Governor reiterating his previous stance in that the bank is basically in a “wait and see” mode until there’s greater clarity on Brexit. Selected comments from Carney are as follows:

• Expectations of households and businesses diverging from forecast

• UK fiscal policy moving towards a more accommodative stance

• Financial markets are hedging their bets against Brexit to the downside with sterling risk reversals building

• A smooth Brexit transition could lead to some pound depreciation

• A disruptive withdrawal could result in some further depreciation

• BoE could respond to Brexit with rate hikes or cuts

There’s a couple points here that are particularly noteworthy with the final comment above showing that a positive Brexit outcome could actually lead to a faster pace of hiking. This is a bit of a jump from the previous comments on this, with the bank not mentioning hiking post-Brexit, rather just cutting if the outcome was negative.

There’s a possible double bottom forming in the GBPUSD pair, with lows around 1.2665 seen as key support. 1.2920 could offer some resistance to further gains but if price can get back above there then further upside may lie ahead with 1.3075  the next level to look to. Source: xStation