British Pound May Rise if Bank of England Issues Rate Cut

2016-07-14 10:11:00

Talking Points:

Pound soars with risky assets before Bank of England interest rate decision
MPC rate cut may boost Sterling as financial stability overshadows yields
NZ Dollar drops as RBNZ hints stage is set for interest rate cut in August

Risk appetite is swelling as markets turn their attention to the Bank of England monetary policy announcement. A narrow majority of economists polled by Bloomberg (31/54) expect the central will reduce the benchmark lending rate, with most projecting a 25bps cut to a record–low 0.25 percent. The anti-risk Japanese Yenis underperforming while the sentiment-geared Australian and Canadian Dollars are tracking share prices higher.

The New Zealand Dollar is diverging from the broader risk-on trade dynamics. The currency plunged after the RBNZ said that it would publish an assessment of economic trends on July 21 outside the usual meeting schedule, accounting for the long gap between June and August policy announcements. The Kiwi plunged alongside benchmark bond yields, suggesting traders interpreted this as stage-setting for a rate cut next month.

Perhaps most interestingly, the British Pound is likewise rallying alongside risky assets. This is not as counter-intuitive as it appears at first glance. Investors worried about knock-on effects from post-Brexit instability may see a cut as ultimately good for UK financial health and that of the world at large. It seems reasonable that this would matter more than any yield-based considerations at this stage.

This suggests that a rate cut will probably feed risk-on momentum, amplifying support for higher-yielding currencies while the safe-haven US Dollar follows the Yen downward. OIS-implied policy bets suggest traders have priced in a mere 20 percent chance of a cut, so follow-through seems probable if Mark Carney and company opt to pull the trigger. Sterling may also strengthen further. Alternatively, a status quo result may trigger renewed risk aversion.

Where are FX markets going in the third quarter? See our forecasts here.

Asia Session

GMT	CCY	EVENT	ACT	EXP	PREV
22:00	NZD	ANZ Job Advertisements (MoM) (JUN)	0.5%	-	0.5%
22:00	USD	Fed's Harker Speaks in Philadelphia	-	-	-
22:30	NZD	BusinessNZ Manufacturing PMI (JUN)	57.7	-	57.2
23:01	GBP	RICS House Price Balance (JUN)	16%	10%	19%
01:00	AUD	Consumer Inflation Expectation (JUL)	3.7%	-	3.5%
01:00	NZD	ANZ Consumer Confidence Index (JUL)	118.2	-	118.9
01:00	NZD	ANZ Consumer Confidence (MoM) (JUL)	-0.6%	-	2.3%
01:30	AUD	Employment Change (JUN)	7.9k	10.0k	19.2k
01:30	AUD	Unemployment Rate (JUN)	5.8%	5.8%	5.7%
01:30	AUD	Full Time Employment Change (JUN)	38.4k	-	2.5k
01:30	AUD	Part Time Employment Change (JUN)	-30.6k	-	16.6k
01:30	AUD	Participation Rate (JUN)	64.9%	64.8%	64.8%
01:30	AUD	New Motor Vehicle Sales (MoM) (JUN)	3.1%	-	-1.0%
01:30	AUD	New Motor Vehicle Sales (YoY) (JUN)	2.1%	-	1.8%
03:00	NZD	Non Resident Bond Holdings (JUN)	67.4%	-	68.5%
04:00	JPY	Tokyo Condominium Sales (YoY) (JUN)	-12.9%	-	-14.1%
06:15	AUD	RBA's Ellis in Panel Participation in Sydney	-	-	-

European Session

GMT	CCY	EVENT	EXP/ACT	PREV	IMPACT
07:15	CHF	Producer & Import Prices (MoM) (JUN)	0.1% (A)	0.4%	Low
07:15	CHF	Producer & Import Prices (YoY) (JUN)	-1.0% (A)	-1.2%	Low
11:00	GBP	Bank of England Bank Rate (JUL 14)	0.25%	0.50%	High
11:00	GBP	BOE Asset Purchase Target (JUL)	£375b	£375b	High