Release: UK BOE Rate Decision
Consensus Forecast: 0.50%
Previous: 0.50%
Release: UK BOE Bond Buying Program
Consensus Forecast: +£50B
Date/Time: 2/9/12 7:00 AM ET (12:00 GMT)
In the upcoming Bank of England interest-rate decision on Thursday there is no real chance that the bank lowers or raises interest rates and the focus will be squarely on the bank’s bond buying program. After expanding its bond buying program by £75 billion pounds in October of last year to a total of £275 billion.
The money allocated in October have run out, and so this February meeting is strongly anticipated to see if the BOE will undertake another round of gilt purchases. Speculation is for another £50 billion increase, bringing the total to £325 billion.
That would be a smaller amount than the market anticipated a few months ago but with economic conditions in the euro zone – that UK’s main market – stabilizing and the ECB’s actions helping to buttress the European banking system the Bank of England will likely not be as aggressive this time around.
However the economy continues to struggle under austerity measures as well as concerns about Europe and the in the fourth quarter the UK economy contracting.
In order to forestall a recession or to mitigate any short and shallow recession the central bank is likely to continue it’s a loose monetary policy with more easing.
How Much Easing BOE Decides Key to the Fate of the GBP
If the Bank of England decides to hold off on more guilt purchases and holds its bond buying program steady that would be a big surprise to the market and could help to bolster the pound’s fortunes against key rivals.
If the Bank of England goes the expected route and raises its quantitative easing by the expected £50 billion then it it should come under pressure against the higher-yielding commodity currencies while perhaps maintaining its recent gains against the dollar.
If the the Bank of England decides to raise its bond buying purchase program by another £75 billion then that would add extra pressure on the pound as that would imply a looser monetary policy than expected.
The pace at which is a key central banks – the Fed, the ECB, the Bank of England, and the Bank of Japan – pump more liquidity into the system will have important impact on their respective currencies.
Mainly the central bank that does the most quantitative easing will likely have to weakest currency. Looking at central bank balance sheet as a percentage of GDP we see that the UK is close to the level of the Fed while the ECB has jumped out in front because of its recent LTRO actions.
GBP/USD Eases from 1.59 Prior to Decision
Looking at the pound against the dollar we see a very strong rally since the middle of January and the pair reached the 1.59 area in today’s trading session, though it gave up those highs and retreated back down to 1.5020. There price was supported by the 200 daily EMA (thick gray line). The RSI also has reached the 70 area – normally considered overbought territory, which may have helped be a technical factor for today’s decline.
Looking at this recent price action the Bank of England’s decision should have an important impact. A surprise in which the BOE unleashes less QE would help the pound to bounce up off the 200-ema while a bigger then expected amount of easing could undermine the recent pound strength and cause the pair to further retrace its rally from the last month, with a key level to the downside being 1.5770.
GBP/AUD Probing New Lows, Will BOE be a Catalyst for Further Declines, Or Give the Pound Support
While looking at the pound against the dollar is certainly more popular, it may be more instructive to see how the pound responds against a higher-yielding commodity currency like the Australian dollar following the release.
The GBP/AUD after a consolidation pattern in the middle of January has broken to new lows below 1.4665 and more easing could mean further weakness here.
The daily RSI has been bouncing along the bottom between 30 and 40 for the past month – indicative of a strong bearish trend but also an oversold condition. Still, we could see more declines if 1.4610 is broken as a result of the Bank of England’s decision.
On the flip-side a decision by the BOE to limit its easing could be the catalyst that helps the pound to rally from these recent lows against the Australian dollar. To the upside we’re looking at a break of the 21 EMA as a key signal that the downward trend in the pair has stalled and may face reversal.
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Nick Nasad is an analyst, educator, and trader; and one of the main contributors to FXTimes – provider of Forex News, Analysis, Education, Videos, Charts, and other trading resources.
Information and opinions contained in this report are for educational purposes only and do not constitute an investment advice. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness. FXTimes will not accept liability for any loss of profit or damage which may arise directly, indirectly or consequently from use of or reliance on the trading set-ups or any accompanying chart analysis.
