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​Bank of England rate preview: election helps clear path for monetary policy

With the UK election helping clear some of the Brexit fog, how will the BoE view their role going forward?

BoE Source: Bloomberg

When and where?

The final Bank of England (BoE) monetary policy decision will be made at their London headquarters on Thursday 19 December.

Will we see any change to monetary policy?

Coming in the wake of the all-important UK election, this meeting is going to crucial is laying out the outlook for future policy at the BoE and how it will deal with Brexit. However, despite a significant amount of uncertainty being resolved over the past week, markets expect few changes to the current monetary policy stance. The probability distribution from Refinitiv highlights those expectations, with markets only looking at a 3.2% chance that we see a change in either direction on rates.

Probability distribution

What should we look out for?

The result of last weeks UK election has provided both markets and the BoE with some clarity with regards to the direction the UK is going. Crucially, this is the first time that the BoE has been given almost certainty over the structure of the withdrawal agreement and transitional period. That change could also spark the marginal propensity to consume (MPC) back into life, perhaps allowing greater clarity over where we go from here.

The purchasing managers index (PMI) figures seen for December highlights economic weakness ahead of the election, yet there is a high likeliness that the BoE holds off until we see exactly how the economy is responding to the change in outlook. Should we see an uptick in business activity and sentiment, there is a good chance that the Bank will want to take a more active role in managing the economy. It is notable that we have seen a significant decline in headline consumer price index (CPI) inflation over recent months, taking some of the pressure off the MPC to raise rates to avoid the prices overheating. However, with core inflation (1.7%) above that headline number (1.5%), there will be plenty of interest on whether the committee seeks to raise inflation and growth through further easing, or maintain stability until they see an extreme which forces their hand.

Where now for the pound?

The pound has been on the rise of late, with GBP/USD peaking in the wake of Thursday’s exit poll. The weekly chart highlights the tentative rise through the $1.3382 resistance level, breaking us out from the trend of lower highs seen since early-2018.

However, we have seen the pair pause at a confluence of trendlines up ahead. There is a clear case of technical vs fundamentals, with a break through this resistance zone required to bring about a bullish continuation signal.

GBP/USD weekly chart Source: ProRealTime
GBP/USD weekly chart Source: ProRealTime

On the four-hour chart, the pullback seen in the wake of Thursday’s exit poll provides us with a pause in the recent uptrend. That is likely to continue before long, with the short-term weakness expected to be greeted with another leg higher before long. A break below the $1.305 level would be required to negate this current bullish trend.

GBP/USD four-hour chart Source: ProRealTime
GBP/USD four-hour chart Source: ProRealTime

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Be ready to act on ECB opportunities

Learn how the ECB’s monetary policy announcements affect interest rates and price stability ahead of its next meeting in September 2020.

  • How might the next meeting affect the markets?
  • What are the key rate decisions to watch?
  • Why is the Governing Council announcement important for traders?

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