Bank Of England Disappoints With Its Dovish Rate Decision

|
Includes: FXB, GBB, UUP
by: Mark Yagalla

Summary

Only one Bank of England member voted to raise rates instead of the two or three I had anticipated.

The British pound sold off, but bounced off the lows after Mark Carney’s comments.

British pound is most likely to drift lower against the U.S. dollar.

A lot of people were left disappointed with the latest Bank of England meeting. I being one of them. I was anticipating two, maybe three dissenters voting for a rate hike. Instead, we got one - Ian McCafferty. I laid out earlier this week in an article how critical this meeting was for the British pound. I was anticipating that the results of the meeting would break the British pound out of its 1.55 to 1.5650 trading range that it's been stuck in. Instead, the market sold off and bounced off the 1.5450 support zone and we're back at 1.55.

Why so dovish?

There were a number of reasons why the Bank remains cautious. For one, the rise in the British pound has hurt U.K. exporters and manufacturers. The Bank knows that an imminent rate hike will further strengthen the pound and cause even more damage to U.K. manufacturers.

Second, the Bank considers macro factors when deciding on rate hikes. The Bank cited China's collapsing stock market and the Greek crisis as issues that can impact global growth. The Bank doesn't want to be caught raising rates if the global economy is on the verge of slipping back into recession. It will make things especially hard on the U.K. economy if rates are going up.

Third, the Bank's inflation report said that inflation remains "muted." The drop in energy prices has been a big factor in driving down inflation. However, the Bank does expect inflation to reach its 2% target in two years.

Carney creates confusion

Once the Bank's statement was released, the British pound rightfully and justifiably sold off. Traders were not anticipating such a dovish decision. However, Governor Mark Carney came in to save the Sterling bulls with his press conference. Mark Carney is one central banker that cannot help but talk up his currency. While every other central banker in the world is trying to drive down the value of their currency, Mark Carney does the exact opposite. According to the BBC, he said in his press conference that a rate hike was indeed drawing closer.

What gets me is that if he would have stuck to the script in the release, he would have said that a rate hike wasn't warranted. Instead, he espouses that a hike is getting closer. This is all the bulls needed to hear and they bought the British pound off of his comments. As a result, the British pound is still trading at 1.55.

What's next?

In spite of Carney's comments, a rate hike this year looks extremely unlikely. Mark Carney talks a good game, but he lacks the evidence and support to boost rates. Only one member voted to hike rates at this meeting. If the Bank is going to hike, it will come next year. However, a lot depends upon now and then and macro factors could keep the bank on the sidelines for longer than the market anticipates.

I'm expecting the British pound to drift lower against the U.S. dollar. This meeting has set the tone for the rest of the year and that means no rate hike this year. If the U.S. data over the next two months is strong, that will leave the U.S. as the only major economy on the verge of raising rates. All attention will now be on the Fed.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I can and will enter and exit the forex markets at anytime.