Thursday Doubleheader: BOE and ECB Rate Statements

I’ve got everything you need to know about tomorrow’s BOE and ECB rate decisions right here! Let’s recap what happened in the previous rate statements and discuss market expectations for the upcoming announcements so we can make informed trading decisions and formulate our plan of attack!

Bank of England Rate Statement – 12:00 pm GMT

What happened last month?

In the last meeting, the Bank of England (BOE) kept rates untouched at 0.50% and its asset purchase facility at 375 billion GBP for the fourth straight month.

What can we expect this time?

For the upcoming meeting, analysts don’t expect any change in interest rates but are split as to whether the BOE will halt or continue its stimulus program. Out of 45 economists surveyed by Bloomberg, a large portion–35 participants to be exact–predicted that there will be no change in monetary policy. These economists believe that the BOE will leave the target for asset purchases at 375 billion GBP due to the economy’s nice rebound in Q3 (+1.0% q/q).

The remaining 10, on the other hand, think that the BOE will expand its asset purchase program by 25 or 50 billion GBP. These analysts consider the surge in Q3 as nothing but a one-off event that can’t and won’t be repeated in the near future. Even BOE Chief Economist Spencer Dale expects a “sharp fallback” in Q4, and a “period of relatively weak growth over the next couple of years.”

Another important thing to consider is that the program is about to end this month, so there’s a lot of pressure on the BOE to extend it.

Possible GBP/USD reaction

I see two potential scenarios for the BOE statement.

On one hand, if the BOE leaves rates unchanged and does not expand its asset purchase program, we will likely see GBP/USD rally. On the other hand, if the BOE makes some dovish remarks and expands its asset purchase facility, we will probably see GBP/USD sell off.

European Central Bank Rate Statement – 12:45 pm GMT

What happened last month?

As expected, the European Central Bank (ECB) kept its interest rates unchanged at 0.75% and didn’t roll out any new easing measures in its meeting last month. What came as a shocker, however, was ECB President Mario Draghi‘s accompanying statement.

In his speech, Draghi assured the markets that the central bank’s monetary policy was appropriately set, adding that Spain and Portugal are making significant progress. These words weren’t exactly what the markets had expected to hear. Some analysts had predicted a rate cut, but it was apparent that the ECB didn’t even consider it in its October meeting.

What can we expect this time?

This time around, the markets are expecting the ECB to maintain the status quo and leave its minimum bid rate untouched at 0.75% for the fourth straight month.

Let’s face it – at the moment, there really isn’t a pressing need for the ECB to introduce any new plans since the OMT bond buying program just bought it some time to maintain its wait-and-see stance.

Still, there is a small number of investors out there who think we could see a 0.25% rate cut. Those in the minority point to the euro zone’s deteriorating economic conditions, Spanish bailout concerns, and the recent slide in inflation as valid reasons for more easing.

Possible EUR/USD reaction

The way I see it, the ECB rate statement could result in three possible outcomes.

If the central bank leaves rates unchanged, but adopts a not-so-dovish tone and downplays the euro zone’s problems, I wouldn’t be surprised to see the euro rally. On the other hand, if the ECB’s decision to keep rates untouched is accompanied by a dovish statement that highlights the region’s MANY economic dilemmas, expect the euro to weaken!

Of course, there is a slim probability that Draghi will announce a surprise rate cut. Needless to say, on the off chance that this happens, it will most likely lead to a sharp EUR/USD sell-off.

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