13.09.201800:44 Forex Analysis & Reviews: The September meeting of the Bank of England: preview

Long-term review

Meetings of the British regulator, as a rule, attract special attention of traders of the pound/dollar pair, especially when they are accompanied by the publication of Monetary Policy Summary (summary of monetary policy). But Thursday's meeting of the Bank of England members is unlikely to determine the direction of the pair's movement: despite the importance of this event, traders are now focused more on political twists and turns, and we are talking not only about the prospects of Brexit.

Exchange Rates 13.09.2018 analysis

The wave-like dynamics of the GBP/USD pair is explained by several reasons, among which the dominant place is, of course, the "divorce process" of London and Brussels. But more recently, another fundamental factor has been added to the diverse palette of the news flow – the possible resignation of Theresa May. Here it is worth noting that that under the British prime minister, the armchair has repeatedly been unsteady, she was criticized and criticized both by representatives of the Labor Party and by Conservative Party members.

So this time the press reported that on Tuesday about fifty members of Parliament from the Conservative Party discussed the possibility of the resignation of the head of government. As one of the participants of the meeting told the journalist, his colleagues plan to take active actions in the second half of autumn, when the details of the final agreement between London and Brussels will become known. Theresa May's plan, tentatively called Chequers, does not suit many conservatives (Boris Johnson and David Davis resigned because of her), so if the outlines of a deal with Europe has been acquired, the "hawk wing" of the conservatives is ready to initiate impeachment.

This news had a considerable pressure on the pound, however, in my opinion, there is no reason for concern. First, the last impeachment procedure in Britain was brought to its logical conclusion more than two hundred years ago. In the long history of Britain, this incident was one of a kind. While the parliamentary initiative of impeachment arose quite often. For example, the last time the prime minister wanted to resign was 14 years ago, when Tony Blair was accused of providing false information about the presence of weapons of mass destruction in Iraq. However, despite the seriousness of the charges, the impeachment did not take place. And it is unlikely to take place this time.

And it's not just a complex, multi-level impeachment procedure. Although this nuance also can not be ignored. First, the lower house of Parliament forms a special committee, whose members study the validity (and seriousness) of the charges. The committee then issues its verdict, after which all materials are sent to the House of Lords, who act as arbitrators. In other words, at each stage, the initiators of impeachment must have strong support, and the accusations must be "concrete". Neither of them has any initiative group:

The initiative group has neither: out of 320 representatives of the Conservative party In the House of Commons, the initiative of impeachment was previously supported by only 50 deputies. Moreover, they did not even dare to at least formally launch the impeachment process (this requires 48 signatures), as they are not certain of their victory. All this suggests that on Tuesday the pound reacted too emotionally to the news of a possible impeachment: behind the loud headline there was only an "information bubble", which had a temporary impact on the pair.

Thus, the Bank of England at Thursday's meeting is unlikely to take into account the political "disassembly" of the conservatives. Brexit divided the conservatives into "hawks" and "pigeons," and the confrontation between them has lasted for more than two years. And the threat of impeachment against the prime minister is only an element of information warfare, nothing more.

But the English regulator is unlikely to ignore Brexit's own question. Of course, the representatives of the central bank will not comment on the negotiation process, but at the same time they will certainly remind that the prospects of monetary policy depends on their outcome. Mark Carney has reiterated this, in fact linking the "divorce process" with the actions of the regulator.

In the light of the latest statistical reports, this fact plays a special role. The growth of GDP, inflation and wages against the background of record-low unemployment created the necessary conditions for accelerating the rate hike next year (if the Brexit deal is concluded). If the head of the British central bank tomorrow will allow such a possibility, the pound will receive a strong impetus for its growth. Such a hint means that the regulator is ready to double the rate in 2019 if current trends in the economy of the country remain. It is also worth noting here that Mark Carney recently agreed to remain in office until January 31, 2020, to lead the central bank through the "zone of turbulence" after Britain's exit from the EU. Thus, he extended his mandate for a further seven months, and as did his deputy John Cunliffe.

In summary, it should be noted that the meeting of the Bank of England is unlikely to play the "first violin" among other fundamental factors on Thursday. Mark Carney will ignore the political games of the conservatives, but will surely reiterate the importance of the "divorce process" between London and Brussels. He can also positively assess the dynamics of wage growth in the country and the British economy as a whole.

I note that Mark Carney is more straightforward (compared to Mario Draghi, for example), so we can not exclude the fact that he will allow the probability of accelerating the pace of tightening of monetary policy next year. Naturally, under the condition of a soft Brexit. In this case, the pound will receive strong support, especially if this rhetoric is accompanied by positive signals from the negotiating group.

Exchange Rates 13.09.2018 analysis

From the technical point of view, the pair is now almost at the resistance level of 1.3045 (the lower limit of the Kumo cloud on the daily chart). Also, the pair is between the middle and upper lines of the Bollinger Bands indicator, and the Ichimoku Kinko Hyo indicator formed a "Golden cross" signal. The combination of these signals indicates the priority of long positions with the main target of 1.3150 (the upper limit of the Kumo cloud on D1). However, on the eve of such important fundamental events, relying on techniques is not necessary: the results of Thursday can "redraw" the technical picture of the GBP/USD pair.

*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.

Irina Manzenko,
Analytical expert of InstaForex
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