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GBP/USD Slightly Higher as BoE Opts For Status Quo, ‘Brexit’ in Focus

GBP/USD Slightly Higher as BoE Opts For Status Quo, ‘Brexit’ in Focus

2016-04-14 11:53:00
Oded Shimoni, Junior Currency Analyst
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Talking Points:

- The British Pound slightly higher versus other major currencies

- BoE keeps rates unchanged at 0.50% by a unanimous decision

- “Brexit” said to weigh on certain areas of economic activity

Find Key Turning Points for the British Pound with DailyFX SSI

The British Pound rose versus other major currencies before losing some ground (at the time this report was written) after today’s Bank of England (BoE) rate decision saw interest rates unchanged at 0.50%, as was expected by economists. The Monetary Policy Committee (MPC) voted unanimously 9-0 to maintain the Bank rate at 0.50%, as in the previous meeting. The MPC also voted unanimously to maintain QE bond purchase at a total of £375b billion. With the decision highly expected, attention quickly turned to the meeting minutes and the vote count.

Looking into the Minutes statement, the MPC said that the shortfall in CPI, which is below the 2% target, is due mainly to drags from energy and food prices, while core inflation remains subdued, as consequence of the past appreciation of sterling, weak global inflation and restrained domestic cost growth. Interestingly, the report said that the broad outlook for activity and inflation appears little changed. This remark is in line with the March Minutes, even though inflation figures two days ago beat economists’ expectations.

Regarding the upcoming EU Referendum, the Minutes showed that the committee questions whether the lower level of the Sterling will persist as they judge that the uncertainty surrounding ‘Brexit’ weighed on the currency. The MPC said that there are signs that this uncertainty has begun to weigh on certain areas of economic activity. Perhaps most interestingly, the MPC remarked that referendum effects are likely to make macroeconomic and financial market indicators harder to interpret over the next few months, which will make the committee more cautious in interpreting data.

Inflation figures two days ago seemed to add credibility to a more “hawkish” BoE as higher inflation increases the pressure on the bank to normalize monetary policy sooner rather than later. In this context, it's interesting to note the bank’s cautious approach for interpreting incoming data. This may suggest that the committee may hold off more direct actions before the results of the referendum are known. With that being said, the committee did mention that it is more likely than not that Bank Rate will need to increase over the forecast period, which may explain the initial push higher in the British Pound. As Currency Strategist Christopher Vecchio notes, "if the UK referendum is voted down, then markets will be quick to pull forward BoE rate hike expectations into the second half of 2016, which should help support the British Pound."

GBPUSD5-Minute Chart: April14, 2016

GBP/USD Slightly Higher as BoE Opts For Status Quo, ‘Brexit’ in Focus

--- Written by Oded Shimoni, DailyFX Research

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