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In the shadow of Brexit: the pound ignored the hawkish hints of the Bank of England

The pound actually ignored the so-called "super-Thursday": despite the abundance of information, the GBP/USD pair repeated yesterday's trajectory, remaining within the 30th figure. Although by and large, all the prerequisites for increased volatility for the pair were: within one day, the most important fundamental events took place - the Bank of England meeting, the publication of the quarterly report on inflation, Mark Carney's press conference, and the publication of PMI data in the construction sector of Great Britain. Such a set of information drivers could have a significant impact on the dynamics of the pair, but as often happens, overstated market expectations did not coincide with reality.

Such a phlegmatic reaction from the market was primarily due to the "shadow of Brexit". Against the background of yesterday's statements by British politicians, all other fundamental factors have been relegated to the background - including the English regulator's meeting. Traders do not risk opening large positions for the pair, focusing on the prospects of the "divorce process". In the near future it will become clear whether Teresa May was able to negotiate with the Labour Party or whether the question of approving the transaction will remain in limbo until October 31. Naturally, in the conditions of such uncertainty, it is rather difficult to make trading decisions, even if there are certain signals from the Bank of England. To date, the rebus is complicated by the fact that the English regulator also voiced a very controversial position.


So, immediately after the announcement of the results of the central bank's May meeting, the pound rose to a two-day high against the dollar, as the regulator raised its growth forecast of the country's economy to 1.5% in annual terms (from the previous value of 1.2%). Recall that according to the latest data, economic growth in February was 2% (y/y) - this is the highest growth rate since the end of 2017. The volume of production in the manufacturing industry also surprised a significant increase of 0.9% compared with the previous period. In other words, the English regulator's latest decision looks quite logical and justified, given the dynamics of key macro-indicators.

In addition, today, the Bank of England responded to the dynamics of inflation indicators. Mark Carney acknowledged that the growth rate of wages, as well as the increase in the number of employees exceeded expectations. Following these indicators, consumer spending "caught up" (which is quite logical). In other words, domestic inflationary pressure remains stable, and therefore the regulator is likely to need a tighter monetary policy - if inflationary growth exceeds forecast values. The last phrase surprised investors, because the market did not expect this year more than one round of interest rate increases - and even then, if the "soft" Brexit is implemented. But now there is a possibility of a double increase on the horizon, but again, provided that there is a civilized divorce between Britain and the European Union.

Against the background of such prospects, the pound initially rose, but nearly immediately lost the points it scored. The mood of investors has changed after the central bank published a lowered forecast for inflation. According to members of the regulator, further inflation will slow down - firstly, because of lower energy prices, and secondly, due to the revaluation of the British currency. This fact cooled the fervor of GBP/USD bulls, after which the pair returned to the level of today's discovery, that is, to the bottom of the 30th figure. In addition, traders were disappointed by the fact that all members of the Committee voted for the preservation of the rate in the same form, while some experts expected that at least one of the regulator's representatives would vote for tightening monetary policy.

Thus, the Bank of England's May meeting can not be called "dovish." First, the regulator raised its forecast for GDP growth, and second, it allowed a double increase in the interest rate by the end of this year. In the light of these prospects, a decrease in the inflation forecast does not look catastrophic, especially given the growth of the oil market.


However, the main anchor for the pound is Brexit, or rather, the uncertainty about its prospects. Last year, the Bank of England"tied" the issue of raising rates with a soft Brexit scenario, and today once again reminded traders of this. Therefore, the main focus of GBP/USD traders will now switch to the negotiation process again. According to rumors, the parties made some progress in the negotiations, but no one officially recognized this fact. Politicians' comments are rather vague: Laborites say that the cabinet has changed its approach regarding the prospects for creating a customs union, while government representatives still praise the deal that was agreed with the EU. In turn, during her speech in the House of Commons, Theresa May announced that the vote on the Brexit deal will take place "well before October 31." In other words, the hints of politicians are optimistic, but there are no real steps to approve the deal yet.

Next week, negotiations between the government and the Labour Party will continue. Given the fact that May plans to go to a vote before the elections to the European Parliament (May 25), the events can develop rapidly. The focus of market attention will now shift to this negotiation process - the fate of monetary policy and the fate of the pound will depend on its outcome.

The material has been provided by InstaForex Company -