Thursday, December 19, 2019

BoE is unlikely to change rates during its first monetary policy meeting after elections

Tags
  • Pound
  • Bank of England

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The BoE is set to make its decision on monetary policy later today at 8pm (GMT +8), but it is likely to keep its current monetary policy. Investors will more likely be focused on whether the BoE will announce its successor to outgoing Governor Mark Carney, who will be ending his term as Governor on January 31st 2020.

As the Tories have regained majority in the Commons, the short-term risk of uncertainty surrounding Brexit has reduced. But Johnson’s reluctance to extend the post-Brexit transition period past the December 31st 2020 deadline renews worries for a no-deal Brexit in 2020. Without an extension, the UK only has 11 months to negotiate a trade deal, a timeframe that is unlikely to result in a comprehensive deal between the EU and UK. Economists expect the BoE to hold rates in today’s meeting and cut rates next year as a result of the possibility of a no-deal Brexit.

But the UK’s economy is showing signs of slowdown, with declining labour market data and weak manufacturing PMI data from Markit in December. November’s inflation rate also gives the BoE reason to ease monetary policy, as it holds at a three-year low of 1.5%. A stronger sterling will most likely weigh on inflation rate as well.

Inflation continues to fall short of BoE’s target rate; GDP signals that the UK economy is stagnating

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Unemployment rate continues to stay flat but September’s wage growth declined sharply

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The current favourite to take over Carney as Governor is Dr Dame Minouche Shafik, who has been known to be more dovish on monetary policy during her time as Deputy Governor of the BoE. If Shafik is announced as Carney’s successor, the pound may fall as the long-term outlook for BoE’s monetary policy may become more dovish.

The BoE is unlikely to cut in today’s meeting but will likely signal for a possible rate cut in 2020. With the UK’s politics stabilising as Tories regain majority in parliament the BoE will keep its wait-and-see approach for December. But expect BoE officials to be split on the decision, as officials Michael Saunders and Jonathan Haskel are likely to repeat their vote for a rate cut with more officials possibly joining them. Sterling is expected to fall as a result, with GBP/USD likely falling towards 1.3007. If Shafik is announced as Carney’s successor, GBP/USD may fall even further, possibly to 1.2965’s level, as probabilities for a rate cut in 2020 increases.

Index Scenario Effect on GBP/USD
1 BoE keeps rates unchanged; more than two officials vote for rate cut Fall to 1.3007’s level
2 BoE keeps rates unchanged; more than two officials vote for rate cut and Shafik announced as new Governor Fall to 1.2965’s level
3 BoE keeps rates unchanged; two or less officials vote for rate cut Fall slightly to 1.3053
4 BoE eases monetary policy Fall to 1.2965’s level
*Source: ADSS

Technical Analysis:

GBP/USD

The bears just managed to drive the sterling down after the sterling reached a new high of 1.3492 since May 2018. But the sterling has stabilised as traders wait on the BoE’s decision later today to see if the BoE will hold rates and announce its new successor for the Governor position in the central bank. Expect GBP/USD to still have some downside despite a recent sharp fall, as the RSI level is still slightly above the oversold threshold at 35.29. If the BoE is more dovish or if Shafik is announced as the BoE’s new Governor then expect the sterling to fall slightly to 1.3007’s level as the bears continue to put downward pressure on Cable.

Support: 1.3077 / 1.3007 / 1.2965

Resistance: 1.3226 / 1.3281 / 1.3323

GBP/USD Chart (H4)

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