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Bank Of England Hold Rates For Brexit Decision

The Bank of England (BoE) is expected to ignore the macro trends and maintain the guidance for gradually higher rates as long as Brexit has not been clarified, according to the latest research report from DNB Markets.

The cyclical macro picture has continued to soften, particularly for the manufacturing and construction sectors. The much larger service sector seems to have stabilised for now. Manufacturing will likely continue to be hampered by weaker fundamentals in the eurozone and the ongoing trade war between the US and China.

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The construction sector could slow further as real estate investments will likely be dragged down by continued Brexit uncertainty. While the worsening outlook may substantiate monetary easing, inflation close to target and a marked rise in wage growth points to higher interest rates.

Hence, it is reasonable that the BoE maintains the cautiously tightening bias, indicating a need for somewhat higher rates. As the outlook is strongly dependent on the Brexit outcome (ie. soft, hard or no Brexit), it seems wise to abstain from new signals as long as the there is no clarification yet, the report added.

In August last year, the Bank Rate was lifted from 0.50 percent to 0.75 percent and the BoE has since guided that future hikes “are likely to be at a gradual pace and to a limited extent”. In addition, the BoE has said that the policy response to the Brexit outcome could “be in either direction”.

mifinance

With a still unclarified Brexit outlook, it is reasonable that the guidance remains unchanged at this meeting. At this stage the market is pricing in practically no movement in the Bank Rate until January next year, when there is priced in 72 percent probability of a 25bp cut.

“Our forecast of a 50bp rate cut in November was based on a no-deal Brexit taking place on October 31. This now seems unlikely as a majority in the Parliament voted in favour of a law which prevents such an outcome. In case of a soft Brexit on 31 October or a delay until January, the Bank Rate will likely be kept unchanged until next year,” DNB Markets further commented in the report.

Scenario
TimeframeWeekly
RecommendationBUY
Entry Point1.2460
Take Profit1.2780
Stop Loss1.2330
Key Levels1.2110, 1.2250, 1.2350, 1.2385, 1.2400, 1.2500, 1.2530, 1.2600, 1.2780, 1.2865
Alternative scenario
RecommendationBUY LIMIT
Entry Point1.2400, 1.2385
Take Profit1.2780
Stop Loss1.2330
Key Levels1.2110, 1.2250, 1.2350, 1.2385, 1.2400, 1.2500, 1.2530, 1.2600, 1.2780, 1.2865

Current trend

The pound maintains an uptrend against the US dollar.

In early September, the instrument made an unsuccessful attempt to break through the local minimum of 1.2015.

Having passed it, the pair could not consolidate below key support levels, reversed around and quickly headed up. Having gained more than 500 points in two weeks, the instrument stopped at a key resistance level of 1.2500 and so far remains below it. The oversold pound was supported by strong data on the labor market, industrial output, and the growth rate of the UK economy in July. One should also note a slight weakening of USD, allowing the pair to easily overcome important resistance levels.

Ambiguous releases on key UK indices came out today, but weak data on inflation exerted pressure on GBP.

Support and resistance

The pair has definitely started the uptrend, but there would be no quick strengthening. From the level of 1.2500, the instrument can show a deeper correction to 1.2400, 1.2385 and move upward from them. In the medium term, one can expect growth to 1.2780, 1.2865. UK retail sales data, as well as interest rates and asset purchases, will be released tomorrow. Most likely, the indicators will remain at current levels.

Technical indicators on the D1 chart show the buy signal: MACD shows growth in the volume of long positions and Bollinger Bands have rearranged upwards.

Support levels: 1.2400, 1.2385, 1.2350, 1.2250, 1.2180, 1.2110.

Resistance levels: 1.2500, 1.2530, 1.2600, 1.2780, 1.2865.

 

Trading tips

Long positions may be opened from the current level; pending orders can be put from 1.2400, 1.2385 with the target at 1.2780 and stop loss at 1.2330.