Market News & Analysis
BoE rate hike talk to boost the pound?
Fiona Cincotta June 19, 2019 8:48 PM
The BoE are not expected to hike rates on Thursday; however, they might talk up the probability of a rate hike later this year. Even as central banks around the globe, such as the ECB, the RBA and now potentially the Fed are adopting a more dovish stance towards monetary policy, the BoE could show themselves to be the odd ball with a shift towards a less dovish stance.
A hike seems rather off course, at least that’s what the pound traders think. Domestic political uncertainty, the rising probability of a general election before the end of the year and of course Brexit gives them good reason to be cautious. Yet recent BoE policy makers have signalled that the markets are underestimating the probability of further tightening.
What does the data say?
Inflation is on target at 2%. Wage growth continues to perform well, +3.4% yoy in April. Consumer spending is still low, however spending has increased more quickly recently, owing to the higher wages in real terms. The central bank expects rising wages to boost spending and inflation going forwards.
On the other side of the equation, now that stockpiling has ground to a halt, growth in the second quarter is looking stagnant. Manufacturing is in contraction; business investment continues to be limited and the rise in consumer spending is not sufficient to offset these negatives. Finally add into the mix the increased likelihood of a no deal Brexit should Boris Johnson take the helm as PM and the outlook is certainty gloomy.
What to watch for:
Given that market expectations of a rate hike have completely flattened off, there is a good chance that the BoE will continue hinting towards rate hike later this year. Michael Saunders could even vote in favour of an immediate rate hike. The question is whether pound traders will buy into this talk? The reality is the timing of a hike this year looks close to impossible and a general election more likely.
A less dovish sounding BoE could give the pound a boost in the short term particularly versus those currencies whose central bank has recently adopted a more dovish stance. In this scenario a short EUR/GBP could be an interesting play. However, strength in the pound could be short lived as Brexit and the Tory leadership battle quickly return to the forefront of traders’ minds. Blink and you’ll miss it.
EUR/GBP has broken through its 50 sma and is heading towards it 100 sma. A break through resistance at 0.8870 could open the door to 0.8850 before 0.8825. On the upside 0.8933 should be cleared prior to 0.8970.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
GAIN Capital Singapore Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the GAIN Capital group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), GAIN Capital Singapore Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact GAIN Capital Singapore Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither GAIN Capital Singapore Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
GAIN Capital Singapore Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit cityindex.com.sg for the complete Risk Disclosure Statement.
Cryptocurrencies are not legal tender currency and trading of derivatives on Cryptocurrencies are currently not covered under any regulatory regime in Singapore. Consequently, investors should be aware they do not have protection under the Securities and Futures Act (Cap. 289). Please ensure that you are fully aware of the risks.