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GBP Outlook: BoE Contributions due Tomorrow

May 10, 2016 - Written by David Woodsmith

Noon tomorrow will bring the announcement of the Bank of England's May interest rate decision, which is expected to show an interest rate freeze at 0.50%. If the accompanying minutes are dovish, the Pound can be expected to tumble.

If forecasts for tomorrow morning's UK industrial and manufacturing production results match up with reality, it is possible that the Pound will climb due to three of four expectations being optimistic.

Global Shares Volatility Weighing on the FX Market

The $VIX index is one of the most closely-monitored leading indicators used by speculators and currency market participants. It gauges the frequency of protective ‘put’ orders placed by traders on Chicago’s broad-ranging S&P 500 index – a low reading therefore equates to relatively high levels of confidence from institutional investors, while elevated readings signify increased nervousness which can and has, on occasion, burgeoned into all-out panic.

The darkest days of the 2007-09 global financial crisis saw $VIX erupt, touching almost the 90.00 level as Lehman Brothers collapsed. The financial markets have seen nothing on this scale since, but VIX did head sharply higher at the start of this calendar year as market participants fretted about the potential ramifications of a sharp slowdown in Chinese economic activity. $VIX briefly jumped to above the $30 threshold at this time before settling back down to rock bottom readings in the $13.00s last month.

However, global shares have experienced a pronounced wobble at the start of this month thanks to flaky data releases from major Western economies, including a highly disappointing set of US job creation data, published on Friday. The upshot saw $VIX edge back towards the 15.0000 level; analysts forecast that the real step change higher for VIX will come when the US Federal Reserve begins dropping meaningful hints that another US interest rate hike is imminent.

If global data suggests that the world economy may not be fully ready for further policy tightening from the Fed, then investors will once again abandon risk, sending VIX sharply higher.

Risk-Driven Currencies Forecast to Lose Ground Rapidly

Increased levels for VIX, particularly if these arrive following a sharp whipsaw move higher, will have a stark effect on the global currency markets.

The risk-driven Commodity Dollars will lose ground rapidly in such an event, sending the Pound Sterling (currency : GBP) significantly higher against the Australian Dollar (currency : AUD), New Zealand Dollar (currency : NZD) and the Canadian Dollar (currency : CAD) alike.
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