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BoE Forward Guidance Expected to Trigger Pound Volatility

Published: 7 Aug at 10 AM Tags: Pound Sterling, Euro Exchange Rate, Dollar Exchange Rate, Currency Exchange, Forex, Euro Crisis, UK, Inflation, Pound Euro Exchaneg Rate, Pound Dollar Exchange Rate,

Although the Pound strengthened against both the Euro and US Dollar during the European session as UK industrial production surged and house prices climbed, the British currency went on to post modest losses against the Euro as the common currency garnered support from better-than-expected German factory orders data.

As local trade began Sterling was holding steady against its main currency rivals, trading in the region of 1.5339 against the US Dollar and 86.80 against the Euro.
But Pound volatility can be expected to occur this morning in response to the publication of the Bank of England’s inflation report.

In a break with tradition, BoE Governor Mark Carney is expected to outline forward guidance regarding the future movement of interest rates.

According to industry expert Harry Adams; ‘Realistically he’ll probably reiterate that interest rates will be held low until growth picks up and inflation stabilises around the 2 per cent target. The more he says, the more he leaves himself open and the more the Pound will move. He could take the Fed approach by linking policy to unemployment rate. This would at least give investors some sort of barometer.’

This is Carney’s first major test since taking over the reins of the BoE earlier this summer and what he says today could be influential in bolstering or undermining the UK’s tentative steps towards economic recovery.

As former economist Rob Wood noted: ‘The recovery could quickly lose steam if mortgage rates rise, so the BoE’s job now is to use guidance to ensure that the stimulus is not withdrawn prematurely.’

Investors are expecting that the BoE will state that it intends to hold interest rates at their current level until unemployment drops to a certain rate or inflation expectations move above 2.5 per cent.

An unexpected result could cause considerable Pound fluctuations.

GBP/EUR movement could also be affected by German industrial production figures.

Today’s US consumer credit report could also trigger additional GBP/USD volatility.
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