The Bank of England (BOE) will today release the second interest rates decision for the year. The bank is expected to leave rates unchanged at 0.75%. This will be the fifth consecutive time the bank has left the base lending rate unchanged. It last hiked rates in August last year by 25 basis points. The decision in itself will not be the market mover because it has already been priced in. What will move the market is the accompanying statement, which will outline the rationale for the interest rates decision. It is in this document that the bank will announce what its plans for the entire year.
The bank meets at a difficult period for the United Kingdom’s economy. The kingdom has just 50 days for it to leave the European Union, a body it has belonged into for years. In recent weeks, the house of commons has voted against the exit deal that was negotiated by Theresa May’s government. The house appears to be deeply divided such that it is impossible for one to see a scenario that a hard Brexit or a no-deal Brexit does not happen. A section of Theresa May’s party wants to leave without a deal, while another wants to have a deal that will ensure continuity for the country. The Labor on the other hand appears to be opposing any deal that Theresa May brings to the table.
Therefore, there are three scenarios. First, there is an unlikely scenario that bipartisanship happens and the MPs vote for a deal that is supported by Theresa May. Second, there is a possibility that a no-deal Brexit will happen. This will have dire consequences for the UK. Indeed, a number of companies like Nissan and Airbus have announced their plans to leave the UK in case of a no-deal Brexit. The third scenario is where the deadline for leaving is extended. While this will bring some calm in the market, it will also extend the uncertainty for a longer time.
This week, the country’s services PMI neared the 50 mark, which is an indicator of contraction. The construction PMI of 50.6 was also near the 5o mark and last week, the manufacturing PMI declined to 52.8 from 54.2. The claimant change has also increased as retail sales slow down.
Therefore, faced with a weakening economy, and the risks of a no-deal Brexit, there is a likelihood that the BOE will sound cautious in today’s decision. If this happens, the GBP/USD pair will likely fall to the 1.28500 level, which is also the 50% Fibonacci Retracement level.