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Forex pairs in this Article » GBP/USD (Barcelona) - Stephen Gallo, European Head of Currency Strategy at BMO Capital Markets expects the BoE to remain completely on hold this week, but he feels that there are important risks to be aware of.

Key Quotes

“At this stage, we believe that macro-prudential policy is starting to dominate over monetary policy. This would pertain to how the BoE can manage: the level of stimulus in the system, where that stimulus is directed, and, ultimately, the recovery.”

“We expect GBP/USD to stick to a 1.6375-1.6510 range for most of the week, through the BoE decision on Thursday. For GBP bulls, the most important caveat for participants to be aware of is in fact the BoE’s macro-prudential toolkit. If the latest data are anything to go by, the BoE will probably have more work to do in order to prevent the build-up of imbalances in the housing sector during 1H 2014.”

“We should also recall that the Chancellor requested the FPC ‘review the roles’ of banks’ leverage ratios back in late November.”

“Like the MPC with monetary policy, the Financial Policy Committee can shift macro-prudential policy at any time, even between quarterly meetings. We expect macro-prudential tools to ultimately bear down on the GBP during Q1, and restrain strength. Indirectly, macro-prudential tools can impact the GDP by restraining or lifting inflows.”

“The more macro-prudential tools restrain heat in certain sectors of the economy, the less demand there should be for GBP assets from non-residents. We suspect the government would like households to see GBP firm heading into the 2015 elections, but only provided that strength isn´t going hand-in-hand with too much overheating, or a dangerously wide trade gap.”
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