A Tale of Two Central Banks

Both the ECB and the BOE are set to make their monetary policy statements this week so let’s take a look at what happened during their previous decisions to figure out what could happen this time around.

The BOE Interest Rate Decision

What happened in the last time

In the last meeting, the Bank of England (BOE) unsurprisingly left monetary unaltered. It made no changes to the official bank rate of 0.50% and did not expand the 50-billion QE program that is set to end in November.

What’s expected to happen tomorrow

Due to the ticket sales in the London Olympics boosting growth, many economists believe that U.K. has finally exited the recession during the third quarter. That being said, there seems to be little need for any change in the BOE’s monetary policy.

For now, most economists, including me, anticipate that the BOE will once again sit on its hands. The official bank rate, which currently stands at 0.50%, will probably be kept on hold. Additionally, the central bank is expected to make no extension of its asset purchase facility.

Potential GBP/USD reaction

Even though no change in policy is anticipate, the event will likely be an interesting one. In the most recent meeting, it was revealed that one BOE voting member suggested more QE in September, as there was a “good case” for it. In addition, the euro zone debt crisis and government austerity measures are threatening to hurt U.K.’s growth, which could produce a dovish accompany statement.

In fact, many analysts are betting that the BOE will increase the size of its asset purchase facility before the year ends, but just not as soon as September. Overall, just like the ECB meeting, the BOE interest rate decision looks bearish.

The ECB Interest Rate Decision

What happened last time

During the European Central Bank (ECB)‘s previous rate statement, Draghi unveiled the OMT (Outright Monetary Transactions), which is basically a new sovereign debt purchasing plan. Under this program, the central bank would buy 1-year and 3-year bonds in unlimited quantities.

This is designed to help lower borrowing costs for debt-ridden euro zone countries, provided they apply for a bailout or request a credit line from the ESM or EFSF. Bear in mind though that this ECB decision wasn’t a unanimous one and that Germany might be one of the countries who opposed this plan.

What’s expected to happen tomorrow

Some say that such a massive easing program means that the ECB has already laid most, if not all, of its cards on the table and may no longer have any aces up its sleeve. With that, the central bank is not widely expected to have any big announcements this time around. Interest rates will probably be kept at 0.75% and it’s highly likely that no additional stimulus programs will be revealed.

Potential EUR/USD reaction

If that’s the case, EUR/USD might retreat from its short-term relief rally. Over the past few days, EUR/USD has made several attempts to break back above the 1.2950 minor psychological resistance as it struggles to hold on to its recent gains. However, all this might come to an end tomorrow if the ECB decides to sit on its hands.

On the other hand, while the ECB is expected to steer clear of any new easing plans, some strategists believe that the central bank would drop a hint or two regarding a potential rate cut before the year ends. After all, there’s no denying that the euro zone has a bleak economic outlook and the ECB might need to step in to boost growth at some point.

In a nutshell, with barely any positive developments in the euro zone’s economic and fiscal standing, the ECB rate decision seems to have bearish prospects for the euro. Just make sure you keep close tabs on the accompanying statement for confirmation!