Talking Points:

  • The Bank of England rate decision is due noon London time, and speculative interest has been bolstered
  • Though the policy meeting will most likely end with no change, Tuesday's CPI will leverage speculation over future intention
  • For a hawkish outcome (inflation confidence, raised vote count) I prefer GBP/CAD, while GBP/USD and GBP/JPY are better doves

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If it weren't for the remarkable swell in the August consumer inflation (CPI) statistics from the UK earlier this week, the upcoming Bank of England rate decision would have been far less interesting. However, speculative interest has been pique and Pound volatility is now a likely byproduct of the upcoming monetary policy event. The BoE decision is scheduled for noon London time (11:00 GMT) and most agree that there is little chance that the central bank will announce any material changes to its policy settings - either a rate hike or change to the quantitative easing program the group re-upped last August following the Brexit vote. From Bloomberg's economist consensus, we find no one calling for a hike. Swaps offer similar levels of dubiety by market participants. Yet, what the central bank does today isn't where we would derive volatility.

Speculation can carry heavy influence in the markets, and that is no less true for the British Pound. Recently, we have seen the interest in monetary policy rise significantly in the FX market. That focus has been more explicit with the Canadian Dollar given the Bank of Canada's back to back rate hikes that had caught the majority off guard with a pace that was faster than even the Fed's clip. Yet, the interest in disparate policy - and particularly forecasts - has run deeper between the Dollar and Euro. One of the biggest trends in 2017 has been the remarkable climb from EUR/USD. That move is predicated on the respective currencies' policy programs; but not current settings. Rather, the drive has developed in how their moves over the coming months and years are shaping up. It is that sense of forecast surrounding the two most liquid currencies in the world that we find a more aggressive speculation over for the BoE and the Pound.

Earlier this week (Tuesday), the UK reported its inflation figures with a marked acceleration in both headline and core consumer readings. These CPI figures are the primary instrument for calibrating interest rates and unorthodox policies, which makes the 2.9 percent headline reading near the top end of the tolerance band particularly remarkable. With that, debate over how long the UK authority can stay anchored to its 0.25 percent rate and QE program started to shift. Specifically, we should look to the policy statement and vote count for evidence as to a changing sentiment around future policy steps. And, moreover, traders would do well to have different strategies for different outcomes. If the BoE is adamant that it is not readying for the eventual rate hike, the recent surge in the Pound will start to fall apart, and pairs like GBP/USD and GBP/JPY will look more appealing for the volatility as well as the counter-currency shifts. In contrast, if the bank signals rising probability for rate hikes in the near future; a pair like GBP/CAD with technical and fundamental appeal would be an attractive option. We discuss the circumstances, strategy and impact of the BoE rate decision and its Sterling options in today's Quick Takes video.

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The Best Pound Pairs for Different BoE Rate Decision OutcomesThe Best Pound Pairs for Different BoE Rate Decision OutcomesThe Best Pound Pairs for Different BoE Rate Decision Outcomes