British GBP/USD Rate's Rally Capped by Bank of England

The Bank of England capped a strengthening GBP to USD conversion having once again blamed the domestic currency for keeping inflation subdued.

At its meeting ending on 9 December 2015, the MPC voted by a majority of 8-1 to maintain Bank Rate at 0.5%.

Following the release the pound to dollar exchange rate conversion slipped to 1.5154 confirming markets have read today’s event as having done little to close the policy gap between the US and UK.

Many in the markets have been suggesting for some time now the Bank of England would follow the lead of the US Fed and raise intrest rates soon after. This assumption has saved the GBPUSD from any extensive downside pressures.

"In GBPUSD the 1.5250/75 area followed by 1.5370/80 will provide resistance, while 1.50/1.4950 is the next important support," say Lloyds Bank Research in a client briefing ahead of the weekend.

The Bank was at pains to say that ECB easing and likely Fed tightening will not have a mechanical link on BoE policy. This is a definite negative for sterling as many had bought the domestic currency having watched the US Fed approach its first rate rise in years.

The inter-bank market exchange rate on sterling-dollar is at 1.5157 while your bank will be offering an exchange rate in the region of 1.47-1.48 having taken their discretionary spread when conducting your payments.

Independent providers are tighter on their spread and one leading FX specialist is seen offering just below the 1.50 level, a substantial advantage.

Inflation Remains Number One Concern

In all, the Bank of England is yet to be convinced inflationary pressures are building up at a pace that warrants an interest rate rise.

Of note to us was the reference to sterling in the minutes:

“The outlook for inflation reflects the balance between persistent drags from factors such as sterling and world export prices and prospective further increases in domestic cost growth.”

The Bank appears to have once again specifically targeted the exchange rate which it obviously deems as being too strong.

We have reported that ING are forecasting the pound to tick higher in 2016 as they expect the Bank to ultimately start ignoring the currency’s role in holding back inflation.

The Bank does however see inflation moving higher over coming years as the impact of the oil price shock diminish.

One positive development is the sanguine stance on the international outlook.

Previously the Bank had sought to force the pound exchange rate complex lower, and push back interest rate expectations, by blaming international developments for remaining cautious.

“There has not been much news on international activity relative to the forecasts contained in the November Report, with global growth having been stable at a rate well below historical averages,” read the minutes.

The rates market is not pricing in a hike until late 2016, and the GBP has been one of the weaker G10 performers since the last BoE meeting.

In essence, the December meeting has offered little support to the sterling bulls.

HSBC however offer hope in saying they think the BoE could hike in the first half of 2016 – well before the market is pricing.

A determinant here would be following the lead of the Federal Reserve which should hike in December.

“This cyclical pressure should help GBP rally in then coming months. Near term, upside targets in GBP-USD could be the 50- and 200- day moving averages at 1.5238 and 1.5318, respectively,” says Dominic Bunning, Strategist at HSBC Bank plc.

US Dollar Capped

The good news for GBPUSD bulls is that the US dollar looks to be unwanted in the run up to the mid-month US Fed meeting.

Lingering uncertainty on the US economic outlook ahead of the Federal Open Market Committee expected rate hike has subdued the market’s response to good US economic data and put the USD under near term pressure.  

Lately, the USD has not been profiteering from strong US economic data.

On December 4, the US non-farm payroll report for November came is strongly at 211,000 new jobs added, a steady 5.0% unemployment rate and an upward revision for the tow previous months, yet the USD did not rally to a higher level.

Could it be that investors are being cautious following the Draghi let down?