BOE monetary policy preview

The pound has increased sharply yesterday after the US Federal Reserve chose not to upgrade its monetary policy outlook for 2017 and the year next. However, the currency has been struggling to gain above 1.27 resistance area since last October as the investors remain worried of the upcoming Brexit negotiations.

• Monetary policy is one of the two major directional and volatility risk for the pound the other being Brexit.

BOE policy and expectation –

• After the referendum last year, the Bank of England (BoE) has reduced rates by 25 basis points, introduced additional asset purchases of £60 billion, introduced £10 billion worth of corporate securities purchase, and £100 billion worth of targeted lending scheme, all to be funded via balance sheet expansion.

• With the UK economy performing much better than expected, the Bank of England (BoE) governor Mark Carney is likely to keep the ammunition dry for future firing. In addition to that, the central bank has indicated that the next move in monetary policy could be on the either side of the spectrum given the recent sharp rise in domestic inflation.

Impact –

• As of now, the interest rate hike by the US Federal reserve last night is rattling the market, so without any further action, or strong words with further policy hints, BoE’s announcement unlikely to make much of an impact.
• Moreover, the focus for the pound is on the upcoming Article 50 trigger and Brexit negotiations, so, without any major change, it is likely to turn out as a non-event.