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British Pound May Rise if Bank of England Issues Rate Cut

British Pound May Rise if Bank of England Issues Rate Cut

Ilya Spivak, Head Strategist, APAC

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

Critical Levels

CCY

Supp 3

Supp 2

Supp 1

Pivot Point

Res 1

Res 2

Res 3

EUR/USD

1.0928

1.1006

1.1048

1.1084

1.1126

1.1162

1.1240

GBP/USD

1.2798

1.3002

1.3075

1.3206

1.3279

1.3410

1.3614

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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