Looming BoE Dominates Pound Sentiment As Markets Brace For More QE

GBP/USD

The pound has started to consolidate after yesterday’s sharp fall lower on the back of disappointing mortgage approvals. Signs that credit markets remain tight have fueled speculation that the BoE will add to their asset purchase program at Thursday’s policy meeting. The focus on monetary policy has seen yield expectations grow in influence from 17% to 20% in the past week. Risk trends remain the main driver of price action explaining 40% of volatility, but have seen its influence diminish from 50% a month ago as it begins to take a back seat to interest rate expectations.

BoE Interest Rate Expectations

Overnight Index Swaps are pricing in 42.6 bps of rate hikes from the BoE over the next twelve months. The outlook for tightening had dimmed to 32.3 bps on February 25th following comments from Governor King which alluded that the central bank will maintain its purchasing program for some time. The MPC’s decision will be the primary focus for sterling traders and could initiate a new bullish trend or a continuation of current bearish momentum. To discuss this and trading ideas join the GBP/USD forum.

FOMC Interest Rate Expectations

Fed funds futures are now pricing in only a 2.4% chance of a rate hike by April with no chance at the FOMC’s upcoming meeting on March 16th, as chairman Ben Bernanke has taken every instance to talk down potential tightening following the raising of the discount rate. The upcoming Non-farm payroll report will have a considerable impact of the direction of future policy as the lack of job growth has been a barrier for any rate hike. Forecasts are for a decline of 50,000 which will dim any expectations of a change in policy during the first half of the year, which could weigh on the greenback.

Risk

Equity markets continue to find support as the prospect of Greece bailout helped extend equities gains. The underlining theme is that at the current low interest rate environment will continue which is overshadowing the expectations that the U.S. economy lost jobs in February. The recent break of trend line resistance may signal that more gains are ahead, as a forming triangle warns of a potential breakout and recent price action points toward the upside. Of course, a dour labor report could quickly erase optimism and lead stocks lower. The GBP/USD remains vulnerable to broader risk trends and they should be taken into account following the BoE’s rate decision on future price direction. Discuss this and other fundamental data join the Economics Forum.

To discuss this report or be added to the email list contact John Rivera, Currency Analyst: jrivera@fxcm.com