Outlook For Sterling Ahead of BOE Decision

The Bank of England (BOE) will
today release the second interest rates decision for the year. The bank is
expected to leave rates unchanged at 0.75%. This will be the fifth consecutive
time the bank has left the base lending rate unchanged. It last hiked rates in
August last year by 25 basis points. The decision in itself will not be the
market mover because it has already been priced in. What will move the market
is the accompanying statement, which will outline the rationale for the
interest rates decision. It is in this document that the bank will announce
what its plans for the entire year.

The bank meets at a difficult
period for the United Kingdom’s economy. The kingdom has just 50 days for it to
leave the European Union, a body it has belonged into for years. In recent
weeks, the house of commons has voted against the exit deal that was negotiated
by Theresa May’s government. The house appears to be deeply divided such that
it is impossible for one to see a scenario that a hard Brexit or a no-deal
Brexit does not happen. A section of Theresa May’s party wants to leave without
a deal, while another wants to have a deal that will ensure continuity for the
country. The Labor on the other hand appears to be opposing any deal that
Theresa May brings to the table.

Therefore, there are three
scenarios. First, there is an unlikely scenario that bipartisanship happens and
the MPs vote for a deal that is supported by Theresa May. Second, there is a
possibility that a no-deal Brexit will happen. This will have dire consequences
for the UK. Indeed, a number of companies like Nissan and Airbus have announced
their plans to leave the UK in case of a no-deal Brexit. The third scenario is
where the deadline for leaving is extended. While this will bring some calm in
the market, it will also extend the uncertainty for a longer time.

This week, the country’s services
PMI neared the 50 mark, which is an indicator of contraction. The construction
PMI of 50.6 was also near the 5o mark and last week, the manufacturing PMI
declined to 52.8 from 54.2. The claimant change has also increased as retail
sales slow down.

Therefore, faced with a weakening
economy, and the risks of a no-deal Brexit, there is a likelihood that the BOE
will sound cautious in today’s decision. If this happens, the GBP/USD pair will
likely fall to the 1.28500 level, which is also the 50% Fibonacci Retracement
level.

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