Research Note: September Bank of England Rate Decision

Research Note: September Bank of England Rate Decision Summary outlook: On Thursday, September 10 at 0700EDT/1100GMT, the Bank of England (BOE) will announce a likely steady interest rate decision, keeping rates at a historical low of 0.50%, according to a unanimous survey of 60 analysts. At the last meeting in August, the BOE surprised markets by announcing an expansion of their asset purchase program, typically referred to as quantitative easing (QE). Since the expanded QE plan has yet to run its course, we do not expect any fresh announcements on unconventional easing, though we may see a status update of the existing QE plan. Barring any surprises (BOE Gov. King and 2 other MPC had requested an even larger QE increase in Aug.), that really only leaves an update on the economic outlook from the BOE. On balance, recent UK economic data have been more positive, but risks remain of a fresh relapse in activity. We think the BOE will sound a cautiously optimistic tone, but will also warn that downside risks remain and that it is too soon to declare an economic recovery has arrived. To the extent the BOE emphasizes the downside risks over recent signs of improvement, we think the market reaction could be GBP negative, but primarily against the EUR, pointing to potential further gains in EUR/GBP. A more negative sterling reaction is likely should the BOE indicate a willingness to consider additional unconventional easing measures at some point in the future. Trading Strategy: We do not expect a significant reaction to the BOE statement for reasons mentioned above, but we are mindful that the BOE has a tendency to surprise. However, absent a surprise move from the BOE, we think the focus will remain on the USD, which is currently showing signs of potentially rebounding after several days of sharp losses. We think fears of the USD weakening sharply now on concerns over its reserve status are overblown and we prefer to buy USD on current weakness. We would also note several other events scheduled for Thursday that may have a larger impact than the BOE: Bank of Canada rate decision (0900EDT/1300GMT): The BOC is also unanimously expected to hold rates steady at 0.25% and refrain from announcing any plans to initiate quantitative easing measures. In its economic update, the BOC may sound more upbeat in light of recent data, but may also emphasize caution due to the uncertain global outlook. On CAD, the BOC may again explicitly caution on the potential for CAD strength to undermine the economic recovery, but will likely need to employ more forceful language (threatening market intervention) to prevent CAD from gaining, especially if the USD remains under pressure. US weekly jobless claims (0830EDT/1230GMT): Initial jobless claims for the week ending Sept.5 may be distorted by the US Labor Day holiday, which occurred on the following Monday. Weekly claims are forecast to remain elevated at 560K (prior 570K) and could prove unnerving for risk appetites. However, should there be a large 'miss' vs. forecasts in the data, we would suspect a seasonality issue and prefer to fade the resulting market movement. Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.