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GBP Rally After BOE Viewed with Caution - August Easing Eyed

GBP Rally After BOE Viewed with Caution - August Easing Eyed

Christopher Vecchio, CFA, Summer Xing,

Talking Points:

- GBP/USD rallies towards $1.3500 on initial 'no cut' news; OIS markets had been pricing 86% chance of cut today.

- Majority of MPC members suggest loosening of policy in August.

- As market volatility stays elevated post-Brexit, it's a good time to review risk management principles.

In a surprise to markets, the Bank of England kept its overnight benchmark rate at 0.50% after the Monetary Policy Committee (MPC) voted 8-1, with one member voting for a cut to 0.25%. The Committee voted unanimously 9-0 to leave its quantitative easing program unchanged at £375bn.

Ahead of the rate decision, overnight index swaps (OIS) markets were pricing in an 86% chance of a rate cut today. As such, the decision shocked the OIS markets, in which investors priced in an 86.5% chance of a rate cut coming into today’s decision. Taking this into consideration, the initial move higher prior to BOE’s rate decision might have been due to short positions being unwound.

After the decision, GBP/USD rose as much as +2.5% to a two-week high of $1.3480, while the international focused benchmark FTSE 100 trimmed. The Bank of England also commented that markets have functioned well, and the improved resilience of the core of the UK financial system and the flexibility of the regulatory framework have allowed the impact of the referendum result to be dampened rather than amplified.

Official data on economic activity covering the period since the referendum results are not yet available, although BOE suggests that there are preliminary signs that the result has affected sentiment among households and companies, as indicated by sharp falls in some measures of business and consumer confidence.

Looking forward, the committee will consider over the coming period how the outlook for the economy has changed in light of the referendum result and will publish its new forecast in its forthcoming Quarterly Inflation Report. Accordingly, with most MPC members suggesting that a loosening of policy would be coming in August (with the new QIR in hand as Currency Analyst James Stanley suggested in this week's trading forecast for the British Pound), and with Theresa May fully in power after her cabinet culling today (if you're not up on the May's rise to UK Prime Minister, we suggest you read the article, "Theresa May: New British PM."), it seems British Pound rallies may be short-lived and provide opportunities to sell.

See the above video for a technical review of the USDOLLAR Index, EUR/USD, USD/JPY, and GBP/USD. If you haven't yet, read the Q3'16 Euro Forecast, "Euro Awakes to Brexit Nightmare; Time for a Turn in EUR/USD?" as well as the rest of all of DailyFX's Q3'16 quarterly forecasts.

Read more: GBP/USD in Flux as May Ascends to PM; USD/CAD Eyes BOC

--- Written by Christopher Vecchio, Currency Strategist and Summer Xing, DailyFX Research

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.