GBP/USD eyeing BoE’s rate cut decision on Thursday before the next big move

By: Michael Harris
Michael Harris
Specialising in economics by academia, with a passion for financial trading, Michael Harris has been a regular contributor to Invezz. His… read more.
on Jan 26, 2020
Updated: Mar 11, 2020
  • TD Securities says rate cut is expected despite the optimism of the UK's PMIs on Friday.
  • Analysts highlight the hard data to be suggesting weakness that will support BoE's decision of rate cut.
  • GBP/USD expected to trade sideways ahead of BoE's decision on Thursday.

Insights into the UK’s manufacturing and services PMI in January revealed in the past week stirred a wave of optimism regarding the UK’s economy at large. Following the improved business sentiment, all eyes are now set on two major events to happen in the coming week; the United Kingdom’s long-awaited departure from the European Union and the Bank of England’s (BoE) decision regarding the monetary policy right before the country establishes itself as a separate entity outside the EU.

TD Securities Says Rate Cut Is Expected Despite Positive PMIs

Analysts from TD Securities commented on the UK’s PMIs on Friday and stated that the probability of a rate cut from the BoE in its Thursday meeting is at an all-time high despite the optimism of the PMI reports.

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Analysts further highlighted that in wake of the Bank of England’s historical reaction function and how it usually operates, it is our estimate that the BoE has been sidestepping the need for monetary policy leniency for at least a year. While the surveys’ data suggested weakness in the past, the experts added, relative optimism of the hard data as compared to that of surveys including PMIs supported BoE’s decision of keeping rates unchanged thus far.

According to economists, the hard data recently turned against the UK’s economy and recorded added weakness towards the end of 2019 that greatly offsets the optimism of the surveys’ data. The greater question, as per the analysts, posed currently at the Bank of England is about the judgment call as to whether the hard data should primarily decide the prospect of a rate cut in the next policy meeting?

TD Securities Says BoE Can’t Ignore The Hard Data Now

TD Securities held its stance that the BoE has avoided rate cut in the past pointing at the correct signal from the hard data while the surveys’ data suggested weakness. Now that the pattern has been flipped, it would not be credible for the central bank to shift its entire focus on the optimism of survey data to base its decision while ignoring the weakness of the hard data altogether. All in all, the analysts were reported quoting, it’s a tough call, near 50-50.

After a major drop on Friday on the release of PMIs, GBP/USD closed the week at 1.3079. The currency pair can be expected to trade sideways ahead of the two major events in the upcoming week that are likely to set the long-term direction for Cable in 2020.

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