Market Analysis

Bank of England: Judging the Tone

It’s probably fair to say that the biggest shock for the currency market today would be if the Bank of England failed to raise interest rates by 0.25 per cent, reversing the cut it made in the aftermath of 2016’s UK referendum vote to leave the European Union. The pound would almost certainly be unloved after such an outcome. But if the currency market is primed for a rate hike, how might the pound (GBPUSD, EURGBP) react to such a rate hike announcement. Writing on Wednesday ThomsonReuters IFR analysts argued that it could be a “buy the rumour, sell the fact” situation and pondered whether any kneejerk post-hike rally in GBPUSD might stall in the mid-1.33s. Maybe, maybe not.

Traders will have their own views on chart levels. That aside, traders planning their strategies might wish to ponder a few possible scenarios. An 8-1 vote in favour of a hike, perhaps expressing a continuing concern about the outlook for UK inflation but combined with a positive spin such as emphasising the low UK unemployment rate, might be seen by currency traders as setting the scene for a further rate hike down the road.

That might give the pound added impetus. Alternatively, if, for example, the vote was closer, perhaps 7-2, but accompanied by a cautious tone which leads the market to believe the Bank of England move is a one-off hike, that might trigger the kind of “dovish tightening” reaction that was seen in EURUSD last week after the ECB recalibrated its asset purchase programme. In essence, if the BOE does hike, it will be the accompanying tone that likely guides how the pound will then trade.

Written by Neal Kimberley, External Currency Analyst.