CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.8% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Pepperstone logo
Pepperstone logo

BOE review - A dovish hold has the GBP rallying

Jan 30, 2020
What was all the fuss about, some might howl. Bank of England Governor Carney brought an end to his near seven-year reign by keeping rates unchanged, after much speculation of a final cut at his swan song.

To his critics, he proved unreliable to the end, but as we thought, he stayed on the side lines, leaving the new man at the helm to navigate the upcoming spending review, Brexit and the coronavirus.

For what it’s worth, Carney’s tenure may be viewed in the history books as somewhat dull, with just three changes to rates over some 69 meetings. However, as the man himself acknowledged in his final speech, conventional tools of monetary policy have become redundant in the search for inflation.

Regarding the meeting, over the short term, members of the nine-strong MPC saw evidence of a pick-up in confidence, investment and activity from the business surveys conducted since the general election. They are paying more attention to the forward-looking indicators than the historic hard data, which is why the committee voted 7-2 – as it did at its last meeting – to keep rates steady. This unchanged split certainly belied investor expectations that the decision was on a knife-edge.

The bank did lower its growth forecast through the entire forecast horizon to 1.1%. This conflicts hugely with the Government’s hoped-for growth rates of around 2.7%, which could lead to some uncomfortable times for Governor Bailey. It’s also the first time during Carney’s term that if rates are on hold, inflation will undershoot the 2% target through the entire forecast period.

Interestingly, on the flipside, the MPC removed the long-standing guidance that any future rate hikes would be ‘limited and gradual’. A touch hawkish? The budget due to be announced on 11 March could also prove to be more expansionary than anticipated, boosting the ‘Boris bounce’ and his promised investment boom this year.

Market reaction

Both the hold and the vote have added upside pressure to the pound. The chances of a cut in March now sit at just 16% from 80% before the meeting, while money markets now no longer have a full cut priced in 2020. As BoE easing gets pushed further out, so there is the potential for a hawkish repricing in sterling with upcoming decent activity data and fiscal stimulus.

Cable has blasted through the 50-day moving average around 1.3050, so next stop is 1.31 before 1.3172, which is near the top of the recent 1.30/1.32 range. Strong buying at that lower level, which has acted as support on seven separate occasions since the start of the year, suggests further bullish momentum is in play near-term. Further out, we note the option market is still positioned for GBP weakness throughout 2020.

Ready to trade?

It's quick and easy to get started. Apply in minutes with our simple application process.

The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients.

Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.