The announcement

The Bank of England has decided to change it’s communication form and has squeezed in many releases into one announcement starting this month. The previous form of communicating was criticized for being inconsistent as information was divided into many releases across two weeks interval.

For the first time under the new order information was provided on the 6th of August. The Monetary Policy Committee vote took place as well as the minutes report, both on one day. The Monetary Policy Committee has voted against a rate hike with the votes divided 1 to 8, with 1 for and 8 against.
The consensus was at 2 to 9 with Ian McCafferty and Martin Weale voting for and possibly a third person as well. This outcome was disappointing for the market. The minutes have shown that there is a divide when it comes to the time of starting to cut down on the QE program. Additionally the inflation report was provided. The forecasts concerning inflation rate have been lowered for the rest of the year. The 2015 forecast has been lowered from 0.6% to 0.3%. It has also been mentioned that the downward pressures from low energy prices may persist until mid 2016. Howoever, by that time inflation should pick up and amount to 1.5% for the year 2016. The BoE currently expects the inflation rate to reach it's target level of 2% in two years time. One year later it's forecast to edge up higher to 2.1%. It has been also mentioned that economic recovery is supported by consumption and business investment.

During his conference the governor of the BoE, Mark Carney, has expressed the view that any insight on an approximate data for a rate hike can not be provided at this time. “It will be the product of economic developments andprospect. In short, it will be data dependent”, he said. In other words, in my opinion, we are in for a roller coaster ride on the GBP in the upcoming months as investors will seek some indication in many data releases. I think we may see lots of volatility as various data will give mixed signals and the market will try to make the best out of it. Special emphasis must be put of course on the CPI releases which will have most vital impact, but other data such as GDP growth, employment, wage growth and house prices will be of importance.

Sonia (sterling over night index average) informs about the interest that is charged for lending/borrowing money in off hours trade. If we take a look at the Sonia futures we can get a clue of when the market anticipates a change in interest rates. Currently Sonia futures point to May 2016 as the most probable date for a rate hike. However, some analysts expect the rate hike to take place as soon as February.

Market Reaction

Last week the main ‘market mover’, just as anticipated, took place on the 6th of August during the so called ‘Super Thursday’ when for the first time Bank of England has combined many releases into one announcement. On this day it has reached the level of over 1.56 to move down below 1.55 and close the day slightly above that level. On Friday it has continued it's depreciation.


The GBP/USD has closed the week at around 1.5490, that's below the psychological level of 1.55. But more importantly in reaction to the Super Thursday announcements the GBP/USD has broken it's upward trend line and formed a large bearish daily candle which encompassed the previous bullish one forming an outside bar. This is quite a strong signal for a potential turnaround of the trend.


The GBP/USD has followed the uptrend since April 2015. However, this close below the trend line in daily and weekly intervals provides a strong signal for a downward trend to begin.

Conclusions

The information released on ‘Super Thursday’ could be in line with the BoE’s objective to weaken the pound. As the low inflation rate is the main concern with the decline in energy prices having a large impact. A weaker pound would mean that the drop in energy prices would be less severe. Additionally the rise in prices of imported goods could push inflation higher. Furthermore, a weaker pound should give a boost to exports even thought the global economy is still lagging behind.

Due to the latest inflation data and forecast releases and the announced dovish monetary policy stance, the break of the uptrend seems to be certain. A comeback to the uptrend is still possible, but much less likely. The turnaround from upward to downward trend seems to be taking place and with the US rate hike on the horizon it seems to be the prevailing direction in the upcoming months.
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