Money Sense: How to Trade the GBP After BOE Decision

Trading

The Bank of England (BOE) managed to surprise currency traders at its Super Thursday meeting on August 3, 2017. Prior to the meeting of the Monetary Policy Committee (MPC) members, the bank rate was 0.25%. BOE governor Mark Carney decided to hold that rate steady, and to temper expectations about growth in the UK economy.

Unlike the previous meeting where policy members voted 5:3 to hold rates steady, this time around the vote was 6:2 in favour of retaining rates at the current level. Currency traders who were gearing up for a short-term spike in the GBP were bitterly disappointed on the day. The reason for tempered expectations was found in the projected growth forecast for 2017, which is now at 1.7%. Previously, the BOE expected UK GDP growth to be 1.9%.

Rising Credit Utilization a Concern

The GBP/USD pair is currently trading at 1.3134, down 0.69%, following the revised economic projections by the Bank of England. The take away from this decision is clear: the UK economy is currently enduring a tough session, what with Brexit-related concerns and decreased consumption expenditure.

These relate to the issue of rising consumer prices and sticky real wages. With less personal disposable income, and rising levels of credit utilization, the UK finds itself in a precarious predicament. A recent report points to a 10% increase in personal loans, with just a 1.5% increase in real wages. This is alarming to the Bank of England, but the central bank is not regarded as the most effective tool for curbing rising levels of consumer credit.

The Bank of England risks a serious dilemma if it raises interest rates willy-nilly. With the rising credit utilization, increased interest rates will add additional pressures to consumers in the form of higher interest repayments. The GBP has taken the news hard, and is trading weaker against a basket of currencies. The employment numbers in the UK have been increasing since June 2016, when the index was at a level of 50. By June 2017, the employment PMI was 52.9, and it edged higher to 53.8 in July. Any reading above 50 is considered expansionary (increasing).

Weiss Finance analyst, George M. Stephanopoulos remains long-term bullish on the UK economy,

In terms of Business Activity, in July 2016 the index plunged to 47.4 (contractionary), but has been increasing steadily since. By June 2017, the business activity index was fairly bullish at 53.4. These are certainly positive trends for the UK economy, and it is thanks to the services sector that growth continues in earnest. Economists’ forecasts were bested with the purchasing managers index figures for July which moved 0.4 points higher than June (53.4) to 53.8 in July. Q2 momentum has spilled over into Q3, and this bodes well for overall projections, albeit at modest growth rates.’

Not So Super Thursday for the British Pound

But judging from the macroeconomic perspective, there haven’t been enough changes in the UK economy to warrant an increase in interest rates. We are seeing increasing uncertainty impacting the UK economy with the Brexit decision coming into play. Companies are not investing additional resources into their UK operations, pending the outcome of Brexit negotiations. If a strategic blueprint can be hammered out, and agreements put in place, we may see capital inflows returning.

Investment levels could plunge by as much as 20% below MPC projections prior to the Brexit vote by 2020. This is a worrying trend for Britons, and the GBP has reacted accordingly. The FTSE 100 index is currently trading up 0.90%, or 66.20 points at 7,477.22 after the Super Thursday run on the pound.

About the Author

Jimmy Rustling, ABC News
Born at an early age, Jimmy Rustling has found solace and comfort knowing that his humble actions have made this multiverse a better place for every man, woman and child ever known to exist. Dr. Jimmy Rustling has won many awards for excellence in writing including fourteen Peabody awards and a handful of Pulitzer Prizes. When Jimmies are not being Rustled the kind Dr. enjoys being an amazing husband to his beautiful, soulmate; Anastasia, a Russian mail order bride of almost 2 months. Dr. Rustling also spends 12-15 hours each day teaching their adopted 8-year-old Syrian refugee daughter how to read and write.

Be the first to comment on "Money Sense: How to Trade the GBP After BOE Decision"

Leave a comment

Your email address will not be published.

*