GBP/USD – Pound Up Sharply as BOE Surprises by Holding Rates

The British pound has posted sharp gains on Thursday, as GBP/USD has jumped some 250 points. The pair is trading at 1.3360. On the release front, the Bank of England surprised the markets and maintained its benchmark rate at 0.50 percent. The asset purchase facility program remained unchanged at 375 billion pounds. In the US, there are two major events on the schedule – the Producers Price Index and Unemployment Claims. After a quiet week on the release front, Friday will be data- heavy, with the US releasing inflation, retail sales and consumer confidence reports.

The drama continues in Britain on the financial and political stages. The markets had widely expected a quarter point cut from the BoE, which would have marked the first rate cut since July 2009. BoE Mark Carney had  strongly hinted at the move when he recently stated that economic conditions had deteriorated and the BoE would need to lower rates in the summer, but Carney has evidently decided to wait. The financial markets are counting on the BoE to cushion the expected economic slowdown in Britain due to Brexit, and there is even talk of a recession. However, there is no hard economic data about the effects of Brexit on the economy and none will be available before September. Testifying before a parliamentary committee on Tuesday, BoE Governor Carney acknowledged that Brexit could lead to downturn in the economy, and that the steps the central bank was taking in response would not provide a “magic bullet” against Brexit.

On the political front, developments are unfolding quickly. On Wednesday, Theresa May replaced David Cameron as Prime Minister. May was a strong supporter of the Remain camp, but she will now be mandated with presiding over Britain’s exit from the European Union. May has stated that the government fully intends to honor the referendum vote, stating emphatically this week that “Brexit means Brexit”. However, Britain’s exit could be a protracted and messy affair, especially as May has named Boris Johnson, leader of the “Leave” camp, as foreign minister. The British electorate may have voted to depart the EU, but the vote may prove to be the easy part of the process. An EU member has never invoked the exit clause before, and there is no timetable as to when the exit will occur or what kind of trade agreement will define the new economic relationship between the EU and Britain. The Brexit vote to leave the EU in late June has caused political and financial turmoil in Britain and sent the pound reeling. Still, there is some optimism in the air as the political landscape has stabilized much more quickly than expected, as the Conservatives were not expected to pick a successor to Cameron before October.

When the Federal Reserve raised interest rates last December, it marked the first time it had done so in close to a decade. After the historic move,  there were high hopes that the Fed would continue with a series of hikes in 2016. Fast forward to July, and the Fed is yet to make a move this year, as the US economy has not matched its impressive growth rates in 2015. Last week’s Fed minutes reinforced the perception that the Fed is unlikely to tighten policy anytime soon, as the tentative Fed remains cautious about the strength of the US economy. Although some Fed members have said that rates could be raised up to two times in 2016, clearly the markets aren’t buying it. Given the current economic climate, the markets are pessimistic about any rates moves before 2017. Investors have priced in no chance of a rate increase at the next Fed meeting on July 26-27, and just an eight percent chance of a hike in 2016. Still, market sentiment can change very quickly, so if US employment and inflation numbers improve in the second half of the year, the likelihood of a rate hike this year will increase.

GBP/USD Fundamentals

Thursday (July 14)

• 7:00 MPC Official Bank Rate Votes. Estimate 0-9-0. Actual 0-1-8
• 7:00 BOE Monetary Policy Summary
• 7:00 BOE Official Bank Rate. Estimate 0.25%. Actual  0.50%
• 7:00 BOE Asset Purchase Facility. Estimate 375B. Actual 375B
• 7:00 MPC Asset Purchase Facility Votes. Estimate 0-9-0. Actual 0-9-0
• 8:30 US Unemployment Claims. Estimate 263K
• 8:30 US PPI. Estimate 0.3%
• 8:30 US Core PPI. Estimate 0.1%
• 10:30 US Natural Gas Storage. Estimate 61B

Upcoming Key Events

Friday (July 15)

• 8:30 US CPI. Estimate 0.2%
• 8:30 US Core CPI. Estimate 0.2%
• 8:30 US Retail Sales. Estimate 0.4%
• 8:30 US Core Retail Sales. Estimate 0.1%
• 10:00 US Preliminary UoM Consumer Sentiment. Estimate 93.7 

* Key releases are in bold

*All release times are EDT

GBP/USD for Thursday, July 14, 2016

GBP/USD July 14 at 7:50 GMT

Open: 1.3118 High: 1.3442 Low: 1.3104 Close: 1.3359

GBP/USD Technical

• GBP/USD moved upwards in the Asian session and has posted sharp gains in the European session
• 1.3349 has switched to a support role following strong gains by GBP/USD in the Thursday session. It is a weak line
• There is resistance at 1.3419

Further levels in both directions:

• Below: 1.3349, 1.3219, 1.3142 and 1.3064
• Above: 1.3419, 1.3513 and 1.3675
• Current range: 1.3349 to 1.3419

OANDA’s Open Positions Ratio

GBP/USD ratio is showing gains by long positions on Thursday. Currently, long positions have a majority (59%), indicative of trader bias towards GBP/USD continuing to move higher.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.