Pound Reaches Seven-Week High, Markets Look to BOE Balancing Act

  • GBP/USD completes bullish flag pattern, eyes December peak
  • Updated BOE outlook could provide ‘modest’ GBP support: MUFG

Levitt: Delicate Brexit Balancing Act for BOE's Carney

Sterling advanced to the highest level in more than seven weeks against the dollar ahead of the Bank of England’s interest-rate decision and Inflation Report, opening the way toward its December peak of $1.2775.

The pound rose for a third day against a broadly weaker greenback, which suffered after the Federal Reserve signaled on Wednesday that it was in no hurry to raise rates. The British currency however weakened against the rest of its Group-of-10 peers. The BOE is expected to upgrade its growth and inflation forecasts but will likely refrain from shifting to a hawkish stance just yet, according to Lee Hardman, a foreign-exchange strategist at MUFG.

“It would be more of a surprise if the BOE also shifted to a more hawkish policy stance after shifting to neutral back in November,” Hardman wrote in a client note. “It is probably too soon for the BOE to signal that they may need to reverse the emergency easing delivered last summer.”

  • Upside risks to the BOE’s inflation outlook have increased “thereby acting to reduce their tolerance for pound weakness. The updated policy signal could provide some modest support for the pound,” Hardman wrote
  • It’s a tough balancing act for BOE governor Mark Carney. He will probably argue that the risks from Brexit mean that faster growth and inflation shouldn’t warrant tighter policy any time soon. Read more here.
  • Hawkish BOE May Lift Pound as Analysts See Gilts Hardy to QE End: see story here
  • Davis to Announce U.K. Govt Brexit Plan in Parliament Today: see story here
  • GBP/USD rises 0.3% to 1.2700
    • Expiries at 1.2595-00 (GBP586m), 1.2660-75 (GBP301m)
  • EUR/GBP little changed at 0.85102
  • 10Y gilt yields -2bps to 1.43%
  • See below technical levels to watch in sterling:
    • GBP/USD -- Bull ‘flag’ pattern completes; Dec. peak jumps into radar at 1.2775
      • 3rd resistance: 1.2775, Dec. 6 high
      • 2nd resistance: 1.2728, Dec. 13 high  
      • 1st resistance: 1.2709-12, 26-wk EMA, pivot r1
      • 1st support: 1.2627, daily pivot 
      • 2nd support: 1.2575, pivot s1
      • 3rd support: 1.2543, Asia low
    • EUR/GBP -- Back under 55-DMA, turns attention to 200-DMA at 0.8425
      • 3rd resistance: 0.8635, Jan. 31 high
      • 2nd resistance: 0.8595, Feb. 1 high
      • 1st resistance: 0.8547, Jan. 31 low
      • 1st support: 0.8493, Feb. 1 low
      • 2nd support: 0.8471, Jan. 26 low
      • 3rd support: 0.8450, Jan. 3 low
  • ECONOMIC DATA: (All times U.K.)
    • 09:30 Jan. Markit/CIPS U.K. Construction PMI, actual 52.2%, prior 54.2%
    • 12:00 Feb. Bank of England Bank Rate, est. 0.250%, prior 0.250%
      • BOE Asset Purchase Target est. GBP435b, prior GBP453b
      • BOE Corporate Bond Target est. GBP10b, prior GBP10b
      • Bank of England Inflation Report
  • NOTE: Carney’s Brexit Expansion of Gilt Purchases Nears Target: Chart

— With assistance by Sejul Gokal

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