Trading the GBP after the BOE Decision

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( — November 22, 2017) — The cable (GBP/USD) has a 50-day moving average of 1.325 and a 200-day moving average of 1.288. At the time of writing (November 16, 2017) the cable was trading around 1.3185. This pair has been particularly volatile over the past 1.5 years, given the Brexit-related uncertainty ravaging the UK economy. Consider that the 52-week low of the GBP/USD pair is 1.19952, and the 52-week high as 1.36158. On 2 November 2017, the Bank of England and the vaunted Monetary Policy Committee (MPC) decided to reverse a decade’s old policy of quantitative easing by tightening monetary policy.

The Monetary Policy Committee voted by margin of 7-2 in favor of an interest rate hike. The BOE governor, Mark Carney announced details of the 25-basis point rate hike and cited several reasons for this, including:

  • The Monetary Policy Committee is tasked with price stability for the UK economy.  For the government, this means a 2% inflation target. For September 2017 and October 2017, the CPI inflation rate was 3%. To arrest runaway inflation, higher interest rates are needed. Inflation is unlikely to return to its 2% objective without a slight increase in the interest rate.
  • Brexit-related concerns weigh heavily on the UK economy as the EU is the biggest trading partner of the United Kingdom. The movement of people, capital, goods and services will be impacted, and the Bank of England needs to take all necessary precautions to protect sterling and the UK economy. The BOE and the MPC work to achieve the desired CPI objective, given the employment situation in the UK and manufacturing output.
  • Currently, UK unemployment is at a 42-year low, and the economy is growing slightly above its lower limit, meaning that monetary stimulus is not required in such great measures today.

September Inflation Puts the Brakes on Sterling Appreciation

Given that the inflation rate in October had not increased as BOE governor Mark Carney had anticipated at the time of the rate hike on Thursday, 2 November 2017, expectations of additional rate hikes have been tempered. Recall that the purpose of a rate hike is to reduce the inflation rate and return the UK economy to stable growth. With evidence that inflation has not moved between September and October, the prospect of additional tightening has moved further back. Therefore, sterling traders were somewhat bearish on the GBP post fact.

Leading foreign currency strategist from Wilkins Finance, Tom Rowland had this to say about recent moves with the currency,

‘… The rather dovish decision by the Bank of England to raise the interest rate by 25-basis points has resulted in limited movement for sterling. Sterling bulls have battled to retain buoyancy with the GBP/USD above the 1.3200 handle. Recently released employment figures in the UK have propelled sterling, but gains were tempered by rather disappointing employment numbers coming out. We have seen net put options on GBP/USD in recent days, and thanks to lackluster wage growth in the UK (far beneath inflation growth), the pressure is being brought to bear. We don’t foresee any additional hikes to the bank rate in the near future. USD bullishness is driving this pair, and there is limited activity in the UK now that the BOEs MPC has acted.’