Central Bank Matchup: RBA vs. BOE

Central bank officials definitely brought their A-game this week, setting off fireworks across the forex charts with their monetary policy announcements. In particular, the folks over at the RBA and BOE were able to spur strong moves among the Aussie and pound pairs simply by adjusting their biases. Here’s a rundown of how it all turned out:

Reserve Bank of Australia (RBA)

  • Kept interest rates on hold at 2.00% as expected
  • Inflation projected to be a little lower than initially expected
  • RBA Governor Stevens: Prospects for improvement firmed a little
AUD/USD 15-min Forex Chart

AUD/USD 15-min Forex Chart

Judging from the Aussie’s bullish forex reaction to the RBA interest rate decision, market participants interpreted the October statement to be less dovish compared to their previous announcements. While policymakers still noted that there are plenty of challenges facing the Australian economy (slowdown in the Asian region, falling commodity prices, and potentially weaker inflation), head honcho Stevens added a new bit to his usual spiel in saying that “prospects for an improvement in economic conditions had firmed a little over recent months.”

Part of the Aussie’s gains can also be attributed to an unwinding of short forex positions by those who were banking on a rate cut. After all, the central bank had been expressing concerns about the overheating housing market for quite some time and the move by top commercial banks to hike mortgage rates last month spurred RBA easing expectations.

Bank of England (BOE)

  • Kept interest rates unchanged at 0.50% as expected
  • Maintained asset purchases of 375 billion GBP as expected
  • MPC voted 1-8 on interest rates, 0-9 on asset purchases
  • Inflation Report: Outlook has weakened since August report
  • BOE Governor Carney: U.K. economy showed mixed progress

Although the BOE also kept monetary policy unchanged as expected, the pound had a sharp bearish forex reaction to the Super Thursday events, which reflected a slight dovish bias. This represents a significant shift from Carney’s earlier rhetoric, which stoked rate hike expectations for early 2016.

During his presser, Carney also admitted that the U.K. economy has shown mixed progress lately. The November BOE Inflation Report wasn’t so chipper either, as it noted that the economic outlook has weakened since the August report and featured some downgrades in their medium-term growth prospects. With that, MPC members hinted that it may take much longer for the central bank to tighten than previously expected, leading forex junkies to project that the first BOE rate hike could be delayed to 2017.

GBP/USD 15-min Forex Chart

GBP/USD 15-min Forex Chart

This was a huge surprise for some, especially among those hardcore pound bulls who have gotten used to hearing upbeat remarks from BOE head Carney. Besides, the U.K. economy had been able to chalk up a few positive economic reports lately, which explains why the uncharacteristically downbeat BOE announcements turned out to be a huge letdown.

What does this mean for AUD and GBP forex trends?

In a nutshell, these changes in central bank biases could spark new trends for AUD and GBP forex pairs, as the former was previously weighed down by rate cut expectations while the latter was propped up by tightening forecasts. Now that the tables have turned, GBP/AUD might be a good candidate for a reversal.

GBP/AUD 4-hour Forex Chart

GBP/AUD 4-hour Forex Chart

A head and shoulders pattern seems to be forming on the pair’s 4-hour forex chart, with the right shoulder still being completed. The neckline of the formation is still a few hundred pips away at the 2.0900 major psychological level, but sustained bearish pressure could trigger a breakdown and seal the deal for a longer-term selloff.

Were you able to make pips off these top-tier central bank events this week? Don’t be shy to share your experiences in our comments section!