BoE maintains bias towards additional rate cuts in 2016 – by Arjun Lakhanpal

The Bank of England’s latest monetary policy statement failed to spark any fireworks for the British pound with U.K. policymakers voting 9-0 to keep interest rates unchanged at 0.25% which was not a surprise considering that they just unleashed an aggressive stimulus package last month. Overall there were no changes made to current policy with UK government bond purchases still at £60 billion & QE at £435 billion in a unanimous outcome. The bank however did recognise the improvement in UK data and consequently expects growth in the third quarter to be 0.3% compared to 0.1% previously. Among the MPC members, Kristin Forbes and Ian McCafferty said that they still believed the current outlook did “not fully warrant” additional stimulus, though they would not vote against its extension “for now” as it could have undesirable repercussions for the economy. As such, the MPC indicated that if at the November forecast round the outlook is seen as generally consistent with the August projections, then a majority of members anticipate another cut in the Bank Rate. Even though the MPC proposed a somewhat more positive assessment of the UK economy and have kept the door open for further action if deemed necessary. Bearing in mind the officials’ indications for data reliance, we expect GBP to be even more sensitive to incoming UK indicators, as they are likely to establish whether the Bank will pull the easing trigger again in November.

At the end of the day the Bank of England is still in wait and see mode. Until Article 50 is invoked and the world discovers the conditions of Brexit, investors will sit at the edge of their seats and policymakers will keep their finger on the stimulus button. Therefore, I still consider sterling a sell on any rallies. But once the dust settles down, we will hopefully get to see the set-up of a clear trend and move away from the current corrective phase, which is what the daily chart of the GBP/USD currently shows. Nevertheless, a short-term downward trend has broken down and the 50-day moving average is now pointing higher with price sitting above it, for now. In the short-term, a bullish scenario would be if price were to break resistance at 1.3280. If seen, this should pave the way for a move towards 1.3370/5 area next, which was previously resistance. The key level to watch is around 1.35. This psychological level also corresponds with the low that was made back in 2009 (at 1.3505). Meanwhile a bearish scenario would be if the Cable were to snap back below the 50-day moving average on a daily closing basis. On the whole the BoE is very pleased with the immediate results of its monetary policy and is not really alarmed by the upside pressures on UK asset prices due to the current QE programme. The most recent positive data is most likely a result of Brexit as the devalued pound is helping the country to increase its attractiveness and the lowering rate is of course stimulating the stock markets as the era of free money continues. The fact is that Brexit provided a fresh boost to the BoE even if it will never be admitted officially.