Bank of England Announcement Seeking to Regain Market’s Trust After ECB Debacle

UK Central Bank Expected to Hold Rates With Vote Count Key for Willingness to Hike

After the market reaction to the European Central Bank (ECB) statement last week after failing to communicate its true commitment investors will be treated to a more stable release from the Bank of England. Governor Mark Carney has started a rejuvenation process at the Old Lady of Threadneedle Street. The decision to publish the minutes alongside the rate statement had added much welcomed transparency to Central Bank interventions.

The BoE is expected to hold the UK Official Bank Rate at 0.50 percent. The economy of the United Kingdom had a phenomenal pace of recovery, but since the fall of 2014 is has struggled to regain that momentum which at one point had it poised to be the first major economy to raise rates. The U.S. Federal Reserve has now retaken that spot and is heavily expected to hike the Fed Funds Rate on December 16. The BoE is expected to follow sometime next year, which is why analysts will be focusing on the MPC vote count to see if the list of dissenters grow.

Bank of England (BoE) will publish the monetary policy summary (MPC) and the minutes of the meeting on Thursday, December 10 at 3:30 am EST.

The GBP/USD surged 1.14 percent in the last 24 hours as traders await the rate announcement form the Federal Reserve on December 16. The Pound is trading above the 1.51 price line. With so much information priced in advance of central bank statements there is some anxiety around the BoE meeting. The forecasts have the BoE holding rates and hiking rates at least two times in 2015. The U.K. rate should be higher than the Fed at the end of next year as the U.S. elections will force the American central bank to avoid any monetary policy decisions while the presidential race heats up.

UK Facing Deflation Again as Energy Prices Remain Low

The latest inflation data point from October was again a negative 0.1 percent. The U.K. economy has not seen a 1.0 percent inflation measure since December of 2014. There is hope that the figures in November to be released next week improve after taking into consideration the effect of the fall of crude last year. The core consumer price index (CPI) was higher given it takes out the more volatile products such as energy at 1.1 percent which is what gives credibility to the Bank of England’s rhetoric about higher rates and that the negative effects pressuring the U.K. economy being labelled transitory.

Energy prices will remain low as supply is far outstripping demand. The Organization of the Petroleum Exporting Countries (OPEC) did not announce a production quota reduction, and non OPEC members fear that letting up will result in losing further market share to the organization’s members who even though they are hurting continue to pump at record levels.

Central Bank Rhetoric Backlash

The market volatility in the last month has been driven by the disconnect between central bank communications and market reactions. The ECB witnessed first hand what could happen when a certain event is priced in and the central bank did not deliver as promised. Half measures have now made their job harder as the EUR is now higher than before the negative rate discount announcement.

The Reserve Bank of New Zealand cut rates earlier today, as expected by 25 basis points. The Kiwi shot up by 1.20 percent in an hour even though the RBNZ used dovish rhetoric to drive the point of the currency still being overvalued.

The Bank of England will face a market full of anxiety. Communication is key in making sure the right message is delivered to avoid building false expectations, and in the other hand making sure it does bring forth all that has been promised.
Forex market events to watch this week:

Thursday, December 10
3:30 am CHF Libor Rate
3:30 am CHF SNB Monetary Policy Assessment
3:30 am CHF SNB Press Conference
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
8:30 am USD Unemployment Claims
Friday, December 11
5:15 am EUR Targeted LTRO
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
10:00 am USD Prelim UoM Consumer Sentiment

*All times EST
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza