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Video: What to Expect from the Pound, Markets at the BoE Decision

Video: What to Expect from the Pound, Markets at the BoE Decision

John Kicklighter, Chief Strategist

Talking Points:

  • A majority of economists expect a BoE rate cut while swaps show the market affords it only a 20 percent change
  • BoE Governor Carney said shortly after the Brexit was confirmed that easing is likely to support the country
  • Rate cuts would be unproductive, QE is a more flexible option; but what impact does this have on the GBP/USD?

See how retail traders are positioning in the majors using the SSI readings on DailyFX's sentiment page.

Shortly after the tally was complete for the EU Referendum, Bank of England Governor Mark Carney stated the central bank would do what it could to promote stability - and that could include easing in the summer. We are coming up on the first official meeting since the Brexit was confirmed, and expectations are certainly running lines of conflicting speculative scenarios. However, the debate and importance of the event does not immediately lend itself to a straightforward market response from the Sterling or capital markets, nor does it even ensure volatility.

There is a slim majority of economists that suspect that the central bank will act preemptively on monetary policy at this month's meeting. Markets are far more skeptical of that outcome. Swaps are pricing in a more reserved 20 percent probability that a traditional rate cut is in the wings (the benchmark is currently 0.50 percent). While still far from the certainty of impending easing, the dovishness is still remarkable considering it is the highest chance of movement in four years. If and when the BoE acts to head off the recession and financial fear that it warned could befall the country prior to the vote, it is likely to come through the non-traditional QE route. Compared to the Fed, BoJ and ECB; the BoE has plenty of room to catch-up.

The decision to hold or ease is certainly an important one for the Pound and local markets, but its impact is not likely to follow the cut-and-dry formula of past years. It used to be that a rate cut or QE would see a currency dive and equities rally. Recently, major moves by the ECB and BoJ spurred exactly the opposite reaction. Furthermore for the Pound, such support from the policy authority would be aimed at promoting stability. And considering the Cable's plunge from 1.5000 to below 1.3000 was the result of the Brexit instability, that may promote the flow of capital back into the UK and in turn lift the Pound. Much of this falls to the sentiment and interpretation of the masses, so we need to watch closely. We discuss the importance of this event and its scenarios in today's Strategy Video.

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