GBP/USD: All eyes on the BoE as bulls start to stall

GBP/USD is struggling in its correction and rally through the trendline resistance, meeting supply at the mid-point of the 1.31 handle with a bearish bias entering the charts. At the time of writing, GBP/USD is trading at 1.3109 having travelled from a high of 1.3151 to a low of 1.3096.

The markets are getting set for the Bank of England on 30th January. However, while market expectations for a January cut have rapidly increased, it is not yet a done deal. Let's get into the arguments and fore and against a rate cut as soon as January. Spoiler alert - Bank of England could well be on hold considering a number of reasons, including a PMI rebound on Friday. 

BoE to hold

First and foremost, this will be the BoE Governor, Mark Carney’s, last before Andrew Bailey, (Prime Minister Boris Johnson favourite over Brexit-dubious Minouche Shafik) comes in to take the helm at the Old Lady mid-March. Even though Bailey was deputy governor at the BOE for three years to 2016, he didn’t sit on the rate-setting Monetary Policy Committee, so his monetary stance is more or less unknown. However, it would be very unusual for an outgoing governor, in their last meeting, to make such a move, especially due to the politics surrounding Brexit. After all, there are nine MPC members who will be unclear as to what future direction the incoming new governor will wish to steer.

This Friday, we will have PMI data and Monetary Policy Members, Tenreyro and Vlieghe, who joined the choir of members signing a dovish tune of late and who have been very specific about these forthcoming reports. Should the surveys rebound, it has been made clear, with a great deal of emphasis on the data, that the Bank of England could well hold-off. A rate cut following a rebound in the Composite reading would be peculiar. 

Also, Brexit is scheduled for the following day – surely the BoE would want to see the impact that this has on the UK economy before making a move? The BoE has made clear time and time again that they will not be motivated by politics and a move around the date could be seen as stimulated by Brexit politics, a message the BoE does not want to send to markets – (Casting minds back, he BoE also held off in July post the referendum, despite markets pricing in a rate cut 100%).

Reasons for BoE to cut

On the other hand, analysts at Nordea, who see the BoE holding, offer some arguments on a list for cutting that has become longer recently as follows:

"Not only have there been dovish MPC signals, but inflation has also softened somewhat as we prewarned back in September. Moreover, it appears the BoE in contrast to 2018, when inflation also undershot target, is not worried about a weaker sterling. And while wages are still holding up nicely, there are some signs that wages could soon lose steam (see chart, note BoE used to be wage hawks, especially Chief Economist Haldane).

With less easing ammo left, it could be wise to move swiftly and aggressively (at least according to Saunders). The cost of waiting could thus be high and as Carney said in his January speech, the BoE only have around 250 bps left in its arsenal, when combining rate cuts, forward guidance and QE."

Overall, even if the BoE does cut rates as soon as the 30th, that doesn't mean we will now be in a new easing cycle from the BoE and therefore, any downside in cable could be shortlived. But then again, it will very much depend on how the Brexit trade negotiations go between the EU and UK. 

GBP/USD levels