GBP/USD: A guide to tomorrow’s BOE interest rate decision

The GBP/USD pair declined slightly as the Bank of England’s (BOE) monetary policy committee started its two-day meeting. The pair is trading at 1.2540, which is a few pips above this week’s low of 1.2451.

Bank of England (BOE) preview

The GBP/USD stayed relatively calm today as investors focused on the upcoming interest rate decision by the BOE.

Analysts polled by Reuters estimate that the 9-member committee will leave interest rates unchanged at the current record low of 0.10%.

They also expect the bank to announce a large addition to the ongoing quantitative easing program. But there is no consensus on the amount the bank will add. According to the Financial Times, analysts expect the bank to add between £100 billion and £200 billion to the QE program.

To starters, QE is a program in which the central bank creates money to purchase government bonds in large quantities. It can also buy corporate debt using the program. The goal of the QE is to ensure that there is enough liquidity in the market and to lower the cost of borrowing by governments and companies.

Early in the crisis, the bank, under Governor Mark Carney, lowered interest rates from 0.75% to 0.1% and launched a £200 billion QE. It then raised the ceiling of the program to £645 billion. As a result, it has been buying existing gilts at a rate of £14 billion per week. It has also bought about £152 billion worth of new gilts.

In addition to QE, the bank has several other options to stimulate the economy. First, it can use the Bank of Japan (BOJ)model and start a yield curve control program. This is where it sets and enforces a target of the long-term gilts. In BOJ’s case, it has set the ten-year yield of Japanese Government Bonds (JGBs) at zero.

Alternatively, the BOE could decide to push interest rates negative. While this is an unconventional move, it is being done by BOJ, Swiss National Bank (SNB), and the ECB. In a previous testimony, Andrew Bailey said that the bank was considering these rates.

BOE meets as inflation slides

The GBP/USD was also little changed because of the UK inflation data. For starters, the Bank of England has two key mandates; to ensure stability of the banking sector and to ensure that prices remain stable.

Today, data from the ONS showed that consumer prices in the UK fell to a four-year low of 0.5%. This decline was lower than April’s low of 0.8%. This decline was mostly due to a sharp decline in prices of leisure activities. They were partially offset by rising food and non-alcoholic prices.

At the same time, core CPI, which excludes food, energy, and tobacco prices declined from the previous 1.4% to 1.2%.

The inflation rate is significantly below the Bank of England target of 2%. In a statement to the FT, Samuel Tombs of Pantheon Economics said:

“We expect CPI inflation to hover close to zero throughout the second half of this year, provided oil prices don’t surge.”

GBP/USD technical analysis

On the daily chart, the GBP/USD pair is slightly above the 50% Fibonacci retracement level. It is also along the 100-day EMA and slightly above the 50-day EMA.  The price is also slightly above the Ichimoku cloud. Therefore, the pair will likely continue falling as bears attempt to move below the 50% Fibonacci retracement level at 1.2470.