How Did the Markets React?
UK markets showed considerable hesitation ahead of tomorrows Bank of England rate decision, as traders question the likelihood of any further interest rate hikes through the coming months. Synthetic forward rates show that futures markets have effectively priced in a 100% chance of a 25bp increase through tomorrows meeting, leaving relatively little question as to what the bank will do. Regardless, traders will likely scrutinize any subsequent bank commentary for clues as what the Monetary Policy Committee will do in December. Looking at price action across markets, it seems that equities, bonds, and FX traders all have one thing in common; they are unwilling to push asset prices far beyond key levels due to fear of surprises through tomorrows announcements.
Bonds UK 10-Year Gilts
Bond prices gave back some of their recent gains, as traders took profits on long positions ahead of the BoE rate decision. Premiums dropped nearly 40 pence to settle at the psychologically significant 95.50 mark, sending yields to 4.56 percent. Regardless, a progressive tightening of the daily trading range emphasized traders reluctance to spark larger moves in interest rate-linked assets. Looking at interest rate forwards, 3 month LIBOR rates have been steadily on the rise since mid-September on expectations of a November hike. This leaves risks to the upside for bond prices, as any negative surprises through tomorrows announcement could lead to a fixed income rally. If, on the other hand, MPC officials hint at further tightening through coming meetings, we could likely see 3-month LIBOR rates set fresh 5-year highs.
FX GBP/USD
Like government debt, the British pound is showing hesitation in throwing its full support behind the Bank of Englands impending rate decision. Heavily favored to raise the nations benchmark lending rate another 25 basis points to a five-and-a-half year high 5.00 percent, the GPBUSD sits just below heavy resistance seen at 1.9144. Such one-sided expectations have grown under conditions of ideally hawkish fundamentals that have themselves contributed to pound strength. When the MPC deliberates in London, they will make a decision based on economic expansion running at a two-year high and consumer inflation holding above the central banks 2.0 percent target for five months in a row. However, despite the positioning and fundamental support for a rate hike, currency traders seem unwilling to bid up the pound ahead of the large event risk. Looking at the chart below, the symmetrical triangle characterizes this caution. Given current positing though, even if the BoE issues the rate hike that is expected, the run to resistance could place enough burden on momentum to keep the GBPUSD from taking out the closely watch support just below 1.9150.
Equities FTSE 100 Index
London equity traders were showing the same uncertainty that bonds and currencies were keying into just prior to the Bank of Englands rate decision. Stock traders on the other hand seemed to be erring on the side of a pass on a 25 basis point hike, speculation that is certainly not shared across the markets. Initially easing off of the double top set on the 7th with a close on the high at 6,244.60, the benchmark index quickly rose through the afternoon session to mark up a triple top. Not only is the close of the day making this very popular chart formation, the resistance level also happens to be a five-and-a-half year high for the stock gauge. Should the BoE follow through with a rate hike, the long trend higher in equities could meet a new hurdle with a reduction in firm investment and possible drop in consumer spending. Whether the central bank hikes, leaves rates unchanged with the potential for another rise in the near future or passes with dovish convictions, the FTSEs position on these precarious levels sets up considerable chart patterns with potential for a lot of post-decision movement.
