GBP/EUR Falls as Bank of England Maintains Steady Tone

The Bank of England has today killed off hopes that the British pound would achieve a new best exchange rate against the euro for 2015.

The decline in the British pound is exactly what we warned might happen - those with outstanding currency payments will now be paying the price.

Analysts we follow were expecting heightened volatility in the British pound to characterise trade on Thursday the 6th of August.

We expressed concern this morning that markets were overly optimistic as it grew increasingly obvious that the risks associated with a neutral event were increasingly to the downside. Read more on this in our pre-release report detailed below. Further reactions can be found in our more recent coverage report here.

In the event, the pound to euro exchange rate conversion has fallen by over half of a percent at the time of writing and is quoted at 1.4221.

The pound to dollar exchange rate conversion is down a similar amount at 1.5508. Support at 1.55 looms.

Those looking to make an interenational payment should be aware that by using your bank account you will suffer a large spread charge. However, by engaging an independent specialist you will be offered a rate closer to the market. This can result in up to 5% more FX being delivered.

Earlier:

It's About the Vote Split

With the policy decision to remain on hold will offer little surprise, it’s the vote composition of the MPC that will be seen as the initial point of interest.

"If Mark Carney’s comments from last month about interest rates increasing are to be viewed as anything more than bluff and bluster we will need to see a change in the MPC’s voting, and at present that is not something that the currency markets are reflecting in sterling strength,” says Alastair McCaig at IG in London.

“Should we see more than two votes for immediate policy action expect that to underline enhanced GBP volatility and GBP impetus. However, we would expect the market to be quick to dismiss any transition of David Miles from a dove to a hawk as this meeting marks his last MPC vote. Rather, we would focus more on Kristin Forbes, (pictured here)” says Jeremy Stretch at CIBC in Canada.

Stretch notes that Forbes has consistently referred to capacity concerns, in particular in relation to the labour market and the potential impact upon wages.

Beyond the vote split, expect the focus to switch to the underlying macro forecasts, in particular the CPI profile and the degree of economic spare capacity.

The last QIR, published in May, indicated that the bank estimated spare capacity in the economy to be just 0.5% of GDP (unchanged from February).

Moreover, the bank concluded that the differential would be used within a year.

“Thus, unless the BoE suddenly assume a much greater rate of productivity growth, it seems probable that the dearth of spare capacity, amidst the risks of accelerating wage growth, suggests that the market remains too sanguine on the UK rate outlook,” comments Stretch.

How should currency speculators play this?

CIBC anticipate that the BoE will back up the recent move towards a more hawkish bias.

“Indeed, amidst our presumption of up to three MPC members dissenting this month this suggests going into the event short of the Sterling strip and long of GBP, in particular versus the EUR and the Dollar bloc commodity currencies (in particular the CAD and NZD),” says Stretch.

Furthermore:

“We have long argued that the GBP positioning was inconsistent with the fundamentals. While it can be said that the market has rather belatedly begun to catch up, it still ended last month net short, as it has since the end of Q3 2014. Our bias remains to prefer net GBP longs, while also favouring a reversal in the short Sterling strip.

“The March ’16 contract has rallied around 10 ticks from mid-July lows, and we would favour looking for a reversal of the trend if we are correct in assuming BoE transparency reveals an increasingly hawkish undertone.”

BEWARE of Disappointment

A word of caution from the team at TD Securities who warn that those expecting a higher exchange rate could be disappointed.

TD have two, somewhat related, concerns.

"First, we note that the long-GBP trade has become a bit popular. We do not think it is an overly crowded trade – yet – but long GBP positions are clearly one of the better ideas floating around out there, in our view.

"Second, we think expectations are rising that we could have a particularly hawkish outcome from the BoE tomorrow. Indeed, some commentators seem to be expecting as many as four dissenters at tomorrow’s MPC vote. We certainly see scope for one or two dissenting votes at tomorrow’s meeting, expectations for more leave open the door for some near-term ‘disappointment’ for those looking for a more aggressive policy stance."

Lloyds Bank are also warning that the event may disappoint:

"Unless we get absolute commitment from the bank for a move in rates it is hard to see the pound move out of recent ranges, as the expectations are for today to be supportive for the GBP."

Those with major currency requirements should look to lock in current rates while leaving the option for higher levels open.