GBP/USD – Pound Jumpy Ahead of BoE Rate Decision

The British pound has shown movement in both directions on Wednesday but is unchanged over the course of the day. GBP/USD is currently trading at 1.3260. This follows strong gains in the Tuesday session. On the release front, the BOE released its quarterly Credit Conditions Survey. In the US, there are no major releases on the schedule. Wednesday’s highlight is Crude Oil Inventories, with the estimate standing at -2.3 million barrels. On Thursday, the US will release two key events – PPI and Unemployment Claims.

The British pound surged on Tuesday, gaining close to 200 points as Britain’s political picture has stabilized more quickly than expected. Prime Minister Cameron was expected to remain in a caretaker role until the autumn, but he will relinquish the reins later on Wednesday, when Home Secretary Theresa May will takes over 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 “Brexit means Brexit”. However, Britain’s exit could be a protracted and messy affair. The British electorate may have voted “Leave”, 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 appears to have stabilized.

All eyes are on the Bank of England, which is widely expected to lower interest rates by a quarter point on Thursday. This would reduce rates to just 0.25 percent, and would mark the first rate reduction since 2009. The markets have priced in a 70 percent chance that the BoE will cut rates on Thursday, but such a dramatic move could well produce some volatility and push the pound to lower levels. The BoE is hoping that a rate cut will help cushion the fallout from the Brexit vote to leave the EU, which was completely unexpected and has caused financial and political turmoil in the UK. Brexit is widely expected to cause an economic slowdown in Britain, possibly even 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 a downturn in the economy, and that the steps the central bank was taking in response would not provide a “magic bullet” against Brexit.

After an historic rate hike in December, 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

Wednesday (July 13)

• 4:30 BOE Credit Conditions Survey
• 8:30 US Import Prices. Estimate 0.6%. Actual 0.2%
• 10:30 US Crude Oil Inventories. Estimate -2.3M
• 13:01 US 30-year Bond Auction
• 14:00 US Beige Book
• 14:00 US Federal Budget Balance. Estimate 24.2B
• 19:01 British RICS House Price Balance. Estimate 8%

Upcoming Key Events

Thursday (July 14)

• 7:00 MPC Official Bank Rate Votes. Estimate 0-9-0
• 7:00 BOE Monetary Policy Summary
• 7:00 BOE Official Bank Rate. Estimate 0.25%
• 7:00 BOE Asset Purchase Facility. Estimate 375B
• 7:00 MPC Asset Purchase Facility Votes. Estimate 0-9-0
• 8:30 US PPI. Estimate 0.3%
• 8:30 US Unemployment Claims. Estimate 263K

* Key releases are in bold

*All release times are EDT

GBP/USD for Wednesday, July 13, 2016

GBP/USD July 13 at 8:20 GMT

Open: 1.3268 High: 1.3336 Low: 1.3219 Close: 1.3261

GBP/USD Technical

• GBP/USD has been choppy in the Asian and European sessions
• 1.3219 is providing support
• There is resistance at 1.3349

Further levels in both directions:

• Below: 1.3219, 1.3142, 1.3064 and 1.2990
• Above: 1.3349, 1.3419 and 1.3513
• Current range: 1.3219 to 1.3349

OANDA’s Open Positions Ratio

GBP/USD ratio is showing limited movement on Wednesday. Long positions have a slight majority (52%), indicative of slight trader bias towards GBP/USD moving 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.