BoE MPC Preview: A Chance To Book Profits?

No change in policy is expected when the BoE meet. However, a worsening outlook could see the central bank adopt a more dovish tone.


Like the Fed, the BoE is not expected to adjust monetary policy when they make their policy announcement and quarterly projections on Thursday morning at 7:00. Interest rates are expected to remain at the historically low level of 0.1% and no changes to the asset purchase programme are expected either after a £100 billion expansion in June.

Data has broadly shown that the economic recovery is picking up. The composite PMI was a solid 57.1 in July and retail sales impressed. However, clouds are gathering. 
Coronavirus numbers are picking up again and localised lockdown are increasing. Scientists are also warning of a second wave in the Autumn as children return to school.

Clouds gathering
Furthermore, the government starts to taper support to the jobs market as from this month meaning that the number of people losing jobs are set to increase and he unemployment rate rise. Big names, particularly across the high street and hospitality sector have already announced plans to lay off thousands of staff.
With this in mind, there is a good chance that the BoE could be preparing themselves for a more sluggish recovery going forwards. The central bank’s initially prediction of a V-shaped recovery looks far too optimistic. Quarterly projections could instead now highlight the risks of a slower more drawn out economic recovery and greater long -term damage to from the coronavirus crisis.

Investors will be watching closely for signs that the central bank is tee-ing up for a fresh injection of stimulus later in the year (pound positive), or as the Bank of America predicted a slashing of interest rates to 0% in November (pound negative). Jaw boning on negative rates could hit sterling and the financial sector although it is unlikely that the BoE’s review of this option will be disclosed just yet.

Chart thoughts
GBP/USD surged over 2.3% last week and after a shaky start this week the pair is once again on the rise as the sell off in the USD continues.  The pair trades firmly above its 50, 100 and 200 daily moving averages on the 4 hour chart. However, the recent run up has been steep and dollar rather than momentum based.

Following the charge through $1.31, Pound traders could see a more dovish BoE tone support a move towards support at $1.3050 (daily low) and $1.2985 (low 4th August & 50 sma).

On the flip side a hawkish surprise could see GBPUSD test resistance at $1.3170 (July high) and $1.32 and $1.3270 (March high).

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