Contrary to what most forex market watchers were expecting, the British pound was actually able to rake in some gains after a downbeat BOE statement.
What’s up with that?!
As you can see from the short-term GBP forex charts I’ve posted above, Cable and Guppy both popped higher upon hearing the BOE’s decision and seeing the minutes of the MPC meeting. Here are some possible explanations as to why this happened:
1. Policymakers didn’t sound THAT dovish
Surprisingly, BOE policymakers didn’t go full dove mode lately, even after crude oil prices hit record lows and lowered the odds of seeing a 2% annual inflation figure anytime soon.
Recall the BOE pushed back rate hike expectations last year mostly due to the oil price slump in early 2015, which was apparently just the tip of the iceberg.Instead of focusing on the downward pressure on inflation, BOE Governor Carney decided to highlight the silver lining in all this, explaining that cheaper oil could allow consumers to spend more cash on other purchases.
Aside from that, policymakers also surmised that the latest oil slide is just a supply issue and that the market could correct itself later on.
2. Cautious comments were already priced in
Another factor that can explain the pound’s bounce against most of its forex rivals right after the BOE statement is profit-taking.
Traders have likely priced in any downbeat remarks weeks ahead before closing out their short GBP positions when the actual event took place.
The classic buy-the-rumor-sell-the-news situation, huh?
3. Lone wolf McCafferty still voted for a rate hike
MPC member Ian McCafferty is the very definition of persistent, as he once again voted to hike interest rates even with a dampened inflation outlook and no support from the rest of his peers.
As he has done so in the last five meetings, McCafferty urged for an increase in the benchmark rate to 0.75% on increased inflationary pressures.
4. Forex traders are holding out for next week’s U.K. reports
Lastly, pound traders probably decided to take it easy with their short positions upon hearing the BOE’s glass-half-full forecast for inflation and consumer spending.
In fact, the annual CPI reading for December and the retail sales reports are up for release next week so forex traders might be holding out for some signs of resilience in those numbers.
Overall, the BOE is still sitting at the dovish end of the spectrum and seems unlikely to be able to tighten monetary policy anytime this year.
Compared to other economies that are more exposed to the Chinese economy and emerging markets, however, the U.K. might still be on a slightly stronger footing.
Do you think that’s enough to keep the pound afloat?