The British Pound had a not so good start in 2016 with the weakness from the last quarter of 2015 continuing to remain strong and steady. The Bank of England meets today for its first monetary policy meeting of the year and expectations are fairly flat. The UK interest rate is expected to remain unchanged at 0.50% while the MPC votes are also unlikely to see any further dissenters besides the lone hawk from Ian McCafferty.
As such, we maintain the view that the BoE will not signal any imminent shifts in monetary policy with the MPC vote count likely to remain 1- 8.
There is, however, a risk of a surprise as the markets remain biased to a dovish tone from the BoE, meaning that it has already been priced in. In the event of a hawkish tone from the BoE’s statement or for that matter, if the markets perceive the BoE’s communication to be anything short of dovish, the GBP could be looking to posting a strong bounce in the markets, which remains a significant risk to consider.
As noted in our November 2015 BoE preview, the British Pound was trading near 1.54. We pointed out back in November of the consolidation pattern price action was playing into with a potential to break out in either direction which would be set off with a strong momentum. The break below 1.52865 saw GBPUSD turn bearish with a few weekly sessions hovering near this support before prices gave away and touched down to 1.4628 support that was identified. GBPUSD broke down a bit stronger than expected and is currently trading near a 39-week low after manufacturing and industrial production numbers for December showed a worse than expected slump.
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With today’s BoE unlikely to spring any surprises, the MPC members could continue to maintain a dovish stance. The November jobs report from the UK disappointed especially on the wage growth aspects, which had shown some promise; rising from 2.4% in July 2015 only to stall near the 3.0% mark before falling back to 2.4% in November 2015. Various MPC members had repeatedly commented that in light of inflation staying flat, wage growth was an important aspect for the BoE and as long as there is no evidence of wages rising, the BoE would be unlikely to send out any hawkish signals to the markets. The dovish rhetoric from the BoE pushed back rate hike speculations, which is now expected to be around Q1 – Q2 of 2017.
Besides the fundamentals, the threat of ‘Brexit’ continues to remain a concern among investors. While there is no set timetable to hold the referendum, there is no doubt that momentum is picking up as expectations build up for the referendum to be held as early as June 2016. While it would be easy to dismiss the threat of a ‘Brexit’, the fact remains that anything can be expected, which is likely to play into the fears and keep the British Pound well pressured to the downside.
