BOE Preview: Will the MPC Tweak its Statement?

This week’s outlook for sterling begins and ends with tomorrow’s BOE monetary policy “decision” and statement. The “decision” is in quotation marks because there’s unlikely to be any deliberation at all: the BOE will almost certainly leave interest rates unchanged at 0.50% and the Asset Purchase Facility at £375B per year. However, whether and how the central bank chooses to tweak its statement could have a big effect on traders’ interest rate expectations.

About a month ago, BOE Governor Carney hinted that the central bank may raise interest rates “sooner than markets currently expect,” fueling a firestorm of rate hike speculation and driving the GBPUSD to a 6-year high. Though he later walked back the comments slightly, the market is now open to the possibility of a BOE rate hike later this year, and the BOE’s statement will be interpreted through that lens.

The key factor will be the BOE’s view on wage growth and inflation. Despite solid growth in the overall number of jobs, UK workers have not seen a commensurate increase in wages, with salary growth trailing even the country’s subdued inflation rate. If the central bank continues to express concern with these two indicators, traders may sell the pound on a decreased likelihood of a rate hike in 2014. On the other hand, if the statement suggests that inflation and wage growth are expected to increase imminently, the market may bring forward its expectation of the first interest rate hike to Q4 of this year, and the pound may rise as a result. Beyond the first rate hike, traders will also watch the overall tone of the statement for any hints about the pace of subsequent interest rate rises moving through 2015.

Moving forward, traders should also watch the changing composition of the BOE’s voting members. The bank has already swapped hawks with Andy Haldane’s recent replacement of Spencer Dale. Last year, Haldane warned the Treasury Committee of the risks of the bank’s QE program, stating that the BOE has “intentionally blown the biggest government bond bubble in history." Meanwhile, two relative unknowns, Nemat Shafik and Kirstin Forbes, will ascend to the bank’s policymaking board next month, so any changes to monetary policy will almost certainly wait until the full complement of bankers is on board.

Technical View: GBPCHF

For more than three months now, the GBPCHF has been quietly grinding higher within a bullish channel. Though it’s stayed generally out of the headlines, the pair has consistently rewarded bulls on its way to hitting a new 2-year high last week. Rates have fallen thus far this week, but based on our read of the current fundamental and technical picture, this drop may prove to be just another minor pullback within the context of the longer-term upward trend.

Supporting this view, the RSI hit overbought territory on Friday, and even after this week’s drop, the indicator remains above its recent bullish trend line. Meanwhile the pair’s MACD is holding steady well above the “0” level, showing steady bullish momentum.

Assuming no major surprises from the BOE, the GBPCHF’s bullish channel should hold. To the topside, bulls will watch for a retest of Monday’s high at 1.5365, followed by a potential move to the 161.8% Fibonacci extension of the Q1 pullback at 1.5530. On the other hand, a break of the channel would likely expose the 50-day MA and previous-resistance-turned-support near 1.5120.

Source: FOREX.com