-Understanding Any Central Bank
-Background on the BoE
-Key Economic Mandates of the BoE
-Pivotal Moves By The BoE
-Future Challenges & 2014 Meetings
As a Forex trader it’s a good idea to get comfortable with major Central Banks and their Monetary Policy which can help you develop trade ideas. If you’re new to Forex, but are familiar with the Stock Markets, you can think of a Central Bank Meeting as the Forex equivalent of the Earnings Announcement. When a company announces their earnings, they’ll also get investors excited about upcoming opportunities that the company is looking to capitalize. Conversely, if you remember 2008-2013, it’s also an ideal time to let investors know that they shouldn’t plan their retirement just yet as the company is facing a few headwinds that will have to be addressed before they can hit their targets as a company. When a Central bank has a monetary policy announcement, they’ll likely discuss what opportunities lie ahead that the economy a whole is looking to capitalize on such as improving employment picture or a healthy showing of inflation, or when there are challenges ahead like inflation getting out of hand that the Central Bank is hoping to keep contained.
Understanding Any Central Bank
To get a good grasp of any central bank, it’s helpful to know three things. First, you need to know what economic measure they find important and worth managing as a central bank. Second, it’s important to know when they are meeting next so that you can manage your trades accordingly. Third, it’s important to know what major undertakings the central bank is involved in which has dramatically affected their currencies value and at some point they may soon unwind which will also have extreme importance to the future value of the currency you’re looking to trade.
Background on the Bank of England (BoE)
The Bank of England is the central bank for the United Kingdom and has been known as one of the world’s longest standing Central Banks, established in 1694, second only to the Riksbank of the Swedish Krona. The governor of the Bank of England is Mark Carney, a Canadian who prior to his post in the UK, was the governor for the Bank of Canada prior to heading the Bank of England.
Key Economic Mandates of the BoE
According to the Bank of England, their two core purposes or mandates are monetary stability which is price stability or inflation and financial stability which is seen through the health of the financial system and is a key marker of the health of England’s Economy. To help you better grasp how the Bank of England is strategically approaching these two mandates, here’s a breakdown of their key measures for each of the two mandates:
Monetary Stability: In order to maintain price stability, the Bank of England and they Monetary Policy Committee or MPC have set an inflation track of 2%. Earlier this week, the Consumer Price Index came out at just 2% showing the BoE has been successful in meeting this target. The focus on inflation allows the BoE to meet overall objectives for economic growth and steady employment. Beyond their 2% inflation target, the BoE works to ensure the Bank has the policies, tools and infrastructure in place to implement monetary policy effectively such as the continuation of their Quantitative Easing program which helped both mandates.
From an FX perspective, the Monetary Policy is of keen interest and in addition to the BoE Interest Rate Meetings, the MPC puts together an inflation report once a quarter is a key report that often pushes the GBP higher or lower. Here are the dates for the 2014 Inflation Report:
Financial Stability: The resilience of the financial system is paramount to the health of the UK economy and therefore necessary for the BoE to accommodate. To support Financial Stability mandates, the bank also has a Financial Policy Committee or FPC which was established in June 2011. From an FX point of view, the Monetary Stability is the key driver of spot rates for the GBP.
Pivotal Moves by the BoE
Like many G4 central banks after the 2008 Global Credit Crisis, the Bank of England instituted an Asset Purchase Facility or APF similar to the Quantitative Easing program in the United States. The APF has operated since January 2009 in order to support both core mandates of the BoE, monetary & fiscal stability. The core purpose of APF is to swap the financial systems illiquid assets with the banks liquid assets for a fixed period of time in order to the fluidity of the financial system and credit markets.
Learn Forex: BoE Interest Rate at Record Lows
In addition to quantitative easing or APF at an amount of £375 billion, the Bank of England has kept interest rates at historically low levels near 0.5% since 2009. Looking at the futures market, most traders and market participants don’t expect the rate to rise until early 2015 at best.
The data has been very good of late but the key question to the BoE is if the good data which represents monetary stability, able to continue its trend higher without government support. A few deputy governors of the BoE are making that argument that over 2014, economic sustainability in the UK that will likely be the key focus. Of course, the recovery is welcomed as the BoE has hoped for such improvements in key data like Real GDP, CPI, & Unemployment %, but a presentation of an alteration to the bank’s policy could erode the new governor’s credibility to keep rates at record lows for an extended period of time..
As 2014 gets under way, BoE governor Carney is expected to change the bank’s forward guidance in the Feb. 12 Inflation Report as unemployment will hit a key level well head of the bank’s anticipation. He would not be alone as a leader of a central bank that is working to balance a recovering economy with increasingly unnecessary accommodative monetary policy. The Federal Reserve behind the US Dollar recently assured that they would not raise interest rates until “well past the time” the unemployment rate hits their threshold of 6.5% and President Draghi of the ECB also committed in January 2014 to use “firmer words” to affirm the bank’s commitment to low rates.
Learn Forex: UK Data Has Kept GBPUSD Well Supported in 2h 2013 & 2014
Created by Tyler Yell
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