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Bank of England Minutes Reveal An Increasingly Dovish Outlook

Bank of England Minutes Reveal An Increasingly Dovish Outlook

2011-09-21 09:14:00
Jonathan Granby,
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THE TAKEAWAY: BoE Mins take on more dovish hue > Further QE looks imminent > GBPUSD takes a dive intraday

The Bank of England minutes revealed few surprises and largely met expectations of an MPC that is slowly edging towards more quantitative easing to support the floundering UK economy. The minutes showed that there was a unanimous 9-0 vote to keep interest rates on hold at 0.50% and an unchanged 8-1 vote to leave asset purchases at 200 billion pounds, Adam Posen remained the sole dissenter calling for an immediate 50 billion pound extension. Pre-release there had been some expectation that we would see a 7-2 or 6-3 asset purchase vote with some members adopting Posen’s ultra-dovish outlook, however this proved not to be the case.

The minutes themselves did tell an increasingly dovish tale though as the central bank said it “reviewed a range of actions available to loosen policy” including the possibility of cutting rates further to 0.25%, although it was decided that when further easing is called for asset purchases would be the “preferable option”. The Bank of England said that the debate on stimulus in the September meeting was ‘finely balanced’ as the MPC made note of the “significant downside news” in the previous month. The bottom line then is that the central bank is mulling its options to ease policy, action it will probably take soon to help support the economy through this extended soft patch of growth.

With the UK facing some of its toughest days outside of war times the expectation that the central bank will continue moving in a dovish, accommodative direction is natural. With a local economy that is absorbing hundreds of thousands of public sector job cuts, weak consumer confidence and exports that are facing lower demand as global growth slows makes for a bleak outlook. Officials also keep reminding us that the UK is unusually exposed, due to proximity and trade, to the EU debt crisis and would suffer deep setbacks should the situation continue to deteriorate in coming months.

With a further loosening of policy now looking imminent the outlook for the pound is as gloomy as the UK weather. As the market digests the increasingly dovish tone of the MPC and begins to price in further easing the pound is likely to be beaten down. This was the reaction that we saw this morning in the aftermath of the vote and we expect pound losses to continue in coming days and weeks.

Bank_of_England_Minutes_Reveal_Increasingly_Dovish_Outlook_body_gbp.png, Bank of England Minutes Reveal An Increasingly Dovish Outlook

After an initial spike higher, after expectations of a less one-side asset purchase vote proved unfounded the selling pressure which had dominated the market throughout the morning took control and drove Gbp/Usd to fresh multi-month lows. It is important to note that should the Fed pull the trigger later today on QE3 then we could see a broad based USD sell-off and Gbp/Usd will likely retrace these intraday losses and the outlook for the pair will change dramatically. As we near the event risk and players start positioning for the Fed we could see the pair re-trace its move lower. However, against other currencies we expect continued Sterling weakness as markets continue to price in the Bank of England firing up its printing presses again soon. For a full technical outlook.

Written by Jonathan Granby, DailyFX Research Team

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

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