As widely expected, the Bank of England (BOE) opted to maintain rates at 0.50% and keep its asset purchase program at 375 billion GBP in its most recent policy meeting. However, traders are wondering what the central bank members talked about behind closed doors.
Will the BOE keep monetary policy as is until 2014, or is there a chance that it will further expand its quantitative easing program?
In the previous meeting minutes, it was revealed that another MPC member, namely BOE Governor Mervyn King, joined the dovish camp. The current count of policy makers in favor of further easing increased to three, up from two. This means that the other six believe that the current monetary policy is appropriate.
For the upcoming minutes, the market generally expects that the outcome of votes did not change. Although this is likely the case, I do believe that there is a small chance that another member has joined the dovish camp.
Paul Tucker delivered a speech a few weeks back that suggested that he is open to expanding the central bank’s quantitative easing program. According to Tucker, he would join Mervyn King, Paul Fisher, and David Miles in the dovish if the growth and inflation outlook continues to deteriorate.
This is a big deal to the market as it would divide monetary policy makers down the middle. If one more joins, then we could see a fresh round of QE in the U.K.
The 3 Potential Scenarios
The way I see it, there are three different ways this can play out on GBP/USD.
If it’s revealed that Tucker (or another MPC member) has joined the dovish camp and voted in favor of more QE, we could see consolidation on GBP/USD break down. Such a move could result in a retest of the former lows around 1.4830.
The second potential scenario is pound neutral. GBP/USD may just continue trading sideways if the minutes show that the central bank is still split 6-3 against further easing and the BOE’s overall stance on monetary policy doesn’t change.
Now, if for some reason, the number of QE supporters declines, I would expect GBP/USD to spike up and break out to the upside. We might even see it finally fill the gap that formed two weekends ago.