The Bank of England held rates unchanged at its December monetary policy meeting held yesterday in line with expectations. Following the expansion of the bank’s bond purchase program in November and given the ongoing Brexit talks, traders were not looking for any further adjustment at this meeting and were instead focused on the bank’s forward guidance.
While there were hints of optimism in the BOE’s message, the bank’s outlook was tilted to the downside. The BOE acknowledged that recent activity had been stronger than expected though noted that the freshly imposed social restrictions had been more stringent than anticipated and are expected to weigh on performance over Q4 and Q1. With regard to Q4 performance, the BOE said: U.K.-weighted global GDP growth in 2020 Q4 is likely to be a little weaker than expected at the time of the November Report.”
The BOE was also clear in highlighting that there is an unusually high amount of uncertainty in its outlook given the dual factors of the pandemic and Brexit trade talks. Looking ahead with regard to how it will manage its monetary policy approach, the BOE said: "It depends on the evolution of the pandemic and measures taken to protect public health, as well as the nature of, and transition to, the new trading arrangements between the European Union and the United Kingdom."
The BOE did acknowledge the recent positive development of COVID vaccinations which are now underway in the UK saying: "The successful rollout of vaccines should support the gradual removal of restrictions and rebound in activity," though added the caveat that: “it is less clear how this prospect will affect the immediate economic behaviour of households and businesses."
Wait & See Mode
In all, the bank’s message broadly asserted a wait-and-see approach, echoing the message from the Fed. With the BOE waiting on the outcome of the ongoing trade talks and with the Q4 data yet to come in, the expectation is that if trade talks fail the BOE is likely to ease further. Similarly, if the Q4 hit is deeper than expected the BOE is also likely to act. However, If trade talks produce a deal and data holds up over Q4 the BOE might opt to hold off further on any easing.
GBPUSD is currently testing the 1.3522 resistance level as the local bullish channel continues to develop. If price can hold above here, the outlook remains bullish with the 1.3819 and 1.4328 levels the next upside targets. To the downside, should price correct lower below the 1.3522 level, the bull channel low will be the next support to note along with the 1.31717 structural support.
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