Bank of England Avoids Expanding its Purchases

The Bank of England (BOE) decided to keep the size of its assets purchase unchanged. Pounds rose against the Euro and the US dollar after the bank announced its decision as it was in contrast with some analysts’ expectation who suggested the possibility of 25 billion pounds increase. The following charts show the market reaction to the decision.

Sterling Benefits from the BOE Rate Cut

On Feb. 5, the Bank of England (BOE) cut the bank rate by 50 basis points to record low 1.00 percent. Pound strengthened against dollar, yen, and also the euro. There was a relatively positive sentiment in financial markets as the U.S. lawmakers became closer to pass Obama's stimulus package.

This case, in my view, is a good example showing why both technical and fundamental data are needed to confirm the trader's decisions and any deviation should be seen as an alarm.

Profit from the BOE Rate Decision

The Bank of England was expected to cut rate on Jan8. However, British pound was rising in all days before the rate decision, mostly because of the weakness in Euro and Dollar. I sold GBPJPY in late American session and the position automatically closed with more than 200 pips of profit well before the rate decision announcement (BoE cut rate by 0.5 percent; in line with expectations).

Dollar's Days!

Dollar continued to appreciate against all major currencies:

Euro-zone: Euro fell nearly 2 percent against dollar, touching 1.5005 and extending its weekly losses close to 4 percent, "the most one-day drop since September 2000". Selling euro accelerated after Trichet's comment on "materializing" risks to the growth, in addition to weak economic data from the euro-area.

UK: British pound followed the same scenario even after policymakers decided to keep the interest rate unchanged. Nationwide consumer confidence declined and HBOS home price index dropped when falling oil (and other commodities) prices strengthened this view that the MPC could finally get the flexibility to cut interest rate.

Oceania: Both Australian and New Zealand dollars extended their losses when having even more reasons. In addition to weak economic data and recent comments from officials on the possibility of interest rate cuts in the near future, these so-called commodity currencies had no choice but depreciation as a response to the sharp decline in oil, gold, copper, and other commodities prices.

Oil: Today's 116 $/b oil may looks relatively cheap and it might be the most important reason behind the dollar's strength and also the rally in stock markets. According to the Bloomberg's analyst, "the decline of oil prices is a significant driver behind this dollar rally because it enables other central banks to turn their eyes away from inflation and focus on growth.''

However there are people who believe that such reaction is mostly technical than fundamental. For example, falling euro below its 200 day moving average (around 1.5227) could have triggered euro-selling orders and resulted in a faster depreciation.

As a summary I want to quote an analyst's view from the Bloomberg: "The most important aspect of the dramatic collapse in the euro dollar is the absence of confirmation from other markets,'' said David Woo, global head of currency strategy at Barclays Capital Inc. in London. "None of the typical drivers of the euro-dollar in the past couple of years could have accounted for the magnitude of this move, which leads one to conclude that this is a technical-driven move. From that point of view, we do not think that this move is sustainable.''

Britain is certainly located in Europe!

Bank of England and European Central Bank both decided to leave interest rates unchanged today. Since there was no statement from BoE, it was just up to ECB's Trichet to shape markets' view on the prospect for the economy and monetary policy in Europe.

Deteriorated consumer confidence, decline in investment, rising unemployment, and the possibility of contraction in the GDP are not hidden to the market and recent depreciation of European currencies is certainly its reaction to the data. However, today's comments worked as a catalyst and triggered another round of selling Euro, Swiss Franc, and not surprisingly the British Pound. (see euro's reaction)

Is it too late for playing BoE rate decision?

BoE is to set rate tomorrow when it is expected to leave it unchanged. Recent comments from MPC's members affected the market sentiment about the future of monetary policy in short term. Two month ago there was a significant possibility of a decrease in interest rate but today is completely different. Although the fundamental data have been even weaker but the policy makers are now clearly concerned about inflation and considered an interest rate rise at their last meeting.

It may explain that why today's drop in Nationwide consumer confidence was unable to change the minds of sterling buyers. Dollar weakness in recent days has been a catalyst helping sterling to appreciate almost one percent for the day.

So, why I can't buy the British pound with confidence? Because I am thinking on the other side; long term negative impact from high levels of interest rates on an economy which faces inflation, falling home prices and slowing consumer spending. I think there will be people who want to benefit by selling the currency at a relatively high price.

If I am true in analysis how I can translate it to profit? I see it too late to be a buyer, but after the decision there would be opportunities for selling the sterling when the entry time would be highly depended on technical data.

Bank of England keep interest rate unchanged

MPC maintained interest rate at 5.0 %, in line with expectations.

Although one or two rate cut is almost certain, but based on interest rates differentials I expect the British pound to appreciate in coming days.