Pound Rock and Rolls as BoE Splits 3 Ways

Last updated 11/18/2009 8:25 AM ET (GMT -5) 1 Comments

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Kathy Lien

Director of Currency Research, GFT

The most anticipated event today was the minutes from this month's Bank of England meeting and boy did they deliver. Taking a look at the prerelease levels in the GBP/USD, the currency pair appears to be trading not far from those levels. However, a quick look at intraday charts (shown below) will reveal roller coaster like volatility. Initially the British pound dropped 60 pips against the U.S. dollar on the heels of the release but it recovered almost as quickly yet the gains failed to maintained. Although there was also a tremendous amount of volatility in EUR/GBP, the euro managed to hold onto its gains which suggests that ultimately traders interpreted the BoE minutes as bearish for the currency.

BoE Split 3 Ways

If you recall, at the monetary policy meeting earlier this month, the Bank of England increased their Quantitative Easing program by GBP25 billion. At the time, the market was divided on how much stimulus the Monetary Policy Commitee would deliver - some called for 25B but most called for 50B. Based upon the voting record at the meeting, we learned that one member (Dale) voted to leave the program unchanged while another (Miles) voted for a larger GBP40B increase. The remaining 7 members approved the GBP25B extension and no one voted in favor of a GBP50B move.

Tinge of Hawkishness from Monetary Policy Members

The tone of the Bank of England minutes also contained a tinge of hawkishness. According to the report,"A number of Committee members noted that one consequence of additional asset purchases would be to bring forward the point at which the extraordinary degree of stimulus could begin to be withdrawn, if the projected impact was realised." This can be interpreted two ways - the first being that the BoE is afraid that by stimulating too much, they would be forced to implement an exit strategy prematurely or second, that the 25B QE extension made earlier this month has already forced them to start working on an exit. Either way, additional stimulus from the BoE is becoming increasingly unlikely.

Also, one of the primary reasons why Dale, who is also the Chief Economist of the BoE voted to leave the program unchanged was because of his fears about inflationary pressures and he felt this way before the latest CPI numbers were released (and they were very strong). However at the same time, some members believed that there could be more downside risks to activity in the near term than suggested by the Inflation Report.

Comments (1)

FXDragon

November 18, 2009 at 03:02 PM ET

I love that guys glasses. He should be the new 007:) What is his name?

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About The Author

Kathy Lien began her FX trading career 10 years ago at J.P. Morgan Chase. After graduating New York University’s Leonard Stern School of Business at the age of 18, Kathy joined the bank's interbank FX trading desk and eventually moved to the cross markets proprietary trading desk. In the interbank market, her ability to create solid fundamental and technical analysis from the myriad of information on the market helped her trade forex spot and options. Her experience eventually led her to be chief strategist at Daily FX where she worked until she joined GFT in 2008.

With her knowledge of forex, as well as her experience trading other products, such as interest rate derivates, bonds, equities, and futures, Lien has built a reputation as an international currency analyst. She is frequently quoted on CNBC, Bloomberg, Fox Business and Reuters. Lien has also written for publications like Active Trader, Futures, and SFO magazine. She is the author of the newly updated Day Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, and the co-author of Millionaire Traders: How Everyday People Are Beating Wall Street at Its Own Game with Boris Schlossberg.

To buy Kathy’s newly updated Day Trading and Swing Trading the Currency Market: Technical and Fundamental Strategies to Profit from Market Moves, click here.