Bank of England (BOE) Decision Props Up Pound

The decision by the Bank of England (BOE) to maintain interest rates at their current level of 0.25% was expected. However, the Monetary Policy Committee (MPC) decision was not unanimous, and that surprised binary options currency traders. The 8-member MPC voted 5-3 in favour of maintaining the record-low bank rate at 0.25%. The GBP/USD pair rallied on the news, because it shows that the Bank of England Governor Mark Carney and the MPC are inching ever closer towards a rate hike.

An interest rate hike has a positive impact on the GBP, since it will increase the interest paid on the currency, and lure foreign capital back to the UK. As such, currency traders tend to sell JPY, EUR, USD etc. and buy the GBP. Currency trading activity is speculative and does not always hinge on absolutes. Sentiment is leaning towards a rate hike and this has buoyed pound bulls who are now unwinding short positions on the GBP/USD pair. Consider that most economists and currency traders were expecting near unanimity in the MPC vote. That didn’t happen.

UK Inflation Expectations Exceeded

The Bank of England set a 2% inflation target, much like the Fed. However, inflation has been steadily rising well above the 2% rate and was last measured at 2.9% in May. This means that UK prices are rising sharply, and the economy could overheat in the absence of a rate hike. Analysts attribute the sharp rise in UK inflation to the volatility swirling around the Brexit decision on June 23, 2016, and more recently the surprise UK general election results.

GBP weakness has made imports costlier, and this filters through to Main Street. On Thursday, 15 June 2017, the GBP gained ground against the greenback, the EUR and the JPY. Expectations of an imminent rate hike are driving sterling bulls. The dissenting members of the monetary policy committee include Michael Saunders, Kristin Forbes, and Ian McCafferty. These MPC members have been pushing for a rate hike of 25-basis points towards 0.50%.

Traders Enjoy ‘In-The-Money’ Outcomes for the GBP and FTSE 100 Index

As a binary options trader, there is plenty to be gained from the recent rise in the value of the GBP. For starters, short-term long positions on the cable are warranted. The GBPs gain is the FTSE 100s loss however. Since approximately 70% + of revenues generated on the all-share index are foreign-based, a stronger GBP results in weaker repatriated earnings for the FTSE 100 index.

On Thursday, 15 June we saw the FTSE 100 index slip to 7,419.36. By Friday, 16 June, the FTSE had regained momentum and was trading at 7,464.87. The whipsaw movements of the FTSE 100 index are commonplace, given the extreme volatility the UK economy has been subjected to. A major concern in the UK economy is that prices are rising while real wages remain steady. This is eating into the personal disposable incomes of Britons and causing a contraction in expenditure and GDP. Over the long-term, this will have a bearish impact on the sterling.

How Did the Fed Decision Impact the GBPUSD Pair?

On Wednesday, June 14, 2017, the Fed FOMC voted to hike interest rates by 25-basis points. Markets had already priced in this decision, and the USD took it in its stride. Nonetheless, by Thursday, Wall Street had plunged on the back of renewed concerns about the Trump administration. Robert Mueller has appointed a 13-member legal panel which will now be investigating President Trump and his son-in-law Jared Kushner vis-à-vis dealings with Russia. This marked the second Fed rate hike for 2017, and one additional rate hike is scheduled moving forward.

Currently, CME Group FedWatch indicates the strongest likelihood of the next rate hike will take place in December 2017. The federal funds rate is now in the target range of 1.00% – 1.25%. Unfortunately for the greenback, optimism remains blunted as the lackluster performance of the US economy (GDP growth for Q1 2017) and disappointing NFP data have hindered its breakout prospects. Nonetheless, we are seeing a tug-of-war between the BOEs leaning towards a 25-basis point rate hike and the Fed’s actions. The GBP/USD pair is likely to continue trading in the 1.27 – 1.29 range.