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Sterling Finds Support Ahead of Pivotal BOE Meeting

Sterling Finds Support Ahead of Pivotal BOE Meeting

2015-10-02 22:30:00
James Stanley, Strategist
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Sterling Finds Support Ahead of Pivotal BOE MeetingSterling Finds Support Ahead of Pivotal BOE Meeting

Fundamental Forecast for British Pound:Neutral

One of the few bright spots in the Global Economy that isn’t currently being engulfed by continued Central Bank jockeying (looking at you, Federal Reserve) has been the United Kingdom. Just three weeks ago, we looked at how British Inflation could potentially bring a new up-trend into the Sterling. And for a few days, that theme worked beautifully as the British Pound continued driving through resistance levels on heavy volume as traders continued to increase rate-hike expectations for the UK. And then the world ran into the Fed. Or more to the point, the world ran into a Federal Reserve that wasn’t yet ready to hike rates, raising numerous red flags as to the state of the global economy and the largest national economy in a world that’s seeing a ‘recovery’ that’s beginning to dwindle before they could ever kick-up interest rates. The prevailing thought being that the UK and the Bank of England wouldn’t raise rates until after the US; and on the heels of this announcement from the Fed, that previous up-trend in the Pound has been priced out of the market. Earlier this week, we set a new intermediate-term low in GBP/USD as rate expectations for the UK continued to diminish.

But the proverbial rubber meets the road next week as the Bank of England convenes for a rate decision, and this should bring considerable interest and clarity to the continued speculation around UK rate trajectory. BOE member Kristin Forbes stoked this interest earlier in September when she mentioned that a stronger British Pound may, in fact, help inflationary pressures in the British economy. This is the diametric opposite of what’s become accepted as common-fact in this post-Neo-Keynesian world, in which Central Banks have purposefully devalued currencies with the goal of bringing inflation, growth and economic prosperity back into their economies. This clearly hasn’t worked, as six years of QE and ‘extraordinarily accommodative’ conditions have done little to show healthy, sustainable growth on the inflation or employment front in the global economy.

Mr. Mark Carney furthered this point in a speech later that week, in which he said that the UK should prepare for rate hikes ‘sooner rather than later,’ while pointing towards the end-of-the-year for more clarity on the rate-hike front.

While a rate hike at Thursday’s meeting is essentially out-of-the-question, the manner in which the MPC votes could provide more insight into rate-hike plans. We’ve become accustomed to 8-1 votes from the nine-member panel with Ian McCafferty being the lone dissenter. But if he’s joined by Martin Weale (who voted for a hike five times last year) or Kristin Forbes, this could increase rate expectations for the UK considerably, and in-turn, bring strength back into the Sterling.

Perhaps more interesting is the Bank’s outlook on the numerous issues swirling through the global economy right now; like diving commodity prices, an Asian-slowdown that no longer looks relegated to China and the potential for even more conflict in the Middle East. At the last meeting, Mr. Carney had mentioned that concerns about China were a contributing factor for the MPC’s 8-1 vote, and at this announcement we can, hopefully, get more clarity from the Bank on how threatening they consider these factors to be for the British economy.

At this meeting on Thursday, the Bank of England has a prime opportunity to dampen rate expectations by indicating that the wage growth that stoked inflationary hopes earlier in September isn’t being considered as strongly as this multitude of spiraling economic forces. This could lead to a break of the 1.5100 support level that’s held GBP/USD, perhaps even yielding the 1.5000 spot should risk-aversion increase enough. But if we do get a second dissenter, or if we hear more from Mr. Carney to the tune of what he was saying towards the middle of September, we could see a strong reaction off of this 1.5100 support level that’s contained the bottom in GBP/USD for the past three trading days, and provided a fairly attractive morning-star formation on the Daily chart to close out the week.

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