The Bank of England (BOE) is anticipated to leave rates unchanged at 0.50 percent on Thursday at 7:00 ET, but this won’t even be the market-moving part of the announcement.
Instead, traders will be looking toward the BOE’s policy statement in order to see if the Monetary Policy Committee (MPC) will end their quantitative easing (QE) program.
Before the BOE’s last policy meeting on July 9, the markets had been anticipating that the MPC would expand their QE program from £125 billion as evidenced by a steady drop in the British pound against the US dollar in the days ahead of the meeting. However, the BOE did not do so and said that it would take another month to complete, after which the British pound rallied and ended the trading day nearly 2 percent higher against the Japanese yen and US dollar.
Now that a month has passed, the markets are betting that the BOE will put QE to an end, even though the UK Treasury approved up to £150 billion in asset purchases. How safe is this bet, and how will the news impact the British pound?
Conflicting Evidence Suggests QE Decision May Not Be Clear-Cut
There is evidence arguing in favor of and against an expansion to the BOE’s QE program. First, clues that the central bank may consider purchasing another £25 billion in assets come from recent lending data published by the BOE, as they said that lending to non-financial corporations fell a record £14.7 billion during Q2 compared to Q1. The BOE also said that the annual rate of M4 money supply growth (excluding intermediate Offshore Financial Centers) fell 0.7 percentage points to 3.1 percent in Q2, all of which suggests that the central bank’s asset purchases haven’t had the desired effects of boosting money supply and increasing lending.
Source: Bank of England
On the other hand, this very evidence may indicate that the level of asset purchases that the UK Treasury and BOE have been willing to commit to will never have the desired effect. With the public likely to be outraged at any effort to expand asset purchases beyond the previously approved amount of £150 billion, the data may really just prove that the program has been a failure and not worth pursuing further.
That said, if the BOE were to end their asset purchases, they will likely try to shine a more positive light on it, as they can cite recent improvements in UK economic data, such as the rise in the purchasing manager’s indices for the UK manufacturing and services sectors to more than 1-year highs in July and a steady increase in mortgage applications in this year to a 14-month high of 47,584 in June.
Trading the BOE Announcement
All told, currency traders have been looking at QE as negative factor for the British pound when it comes to initial announcements, and this sentiment shouldn’t change much when it comes to Thursday’s news. As a result, if the BOE ups the ante by another £25 billion, GBPUSD is likely to see at least a brief drop lower. However, if the central bank finally puts an end to QE, the pair could continue to make its way toward the next significant level of resistance at 1.7500.
For more on strategies based on trading event risk, check out GBP/USD: Trading the Bank of England Rate Decision
Source: FXTrek IntelliCharts
Written by Terri Belkas, Currency Strategist of DailyFX.com
E-mail: tbelkas@dailyfx.com
