What to Look Out For at Today's Big Event

Today's financial market agenda is based around the Bank of England Quarterly Inflation Report which we are covering here.

Going into the 10:30 press conference we see the GBP no longer enjoys the positive momentum against the Euro that was witnessed on Friday and Monday.

Trading Central point out that they prefer long positions on EUR/GBP above 0.863 with targets at 0.8695 & 0.871 in extension.

But below the pivot point at 0.863 they would predict the Euro to sustain further downside with 0.86 and 0.8575 as targets.

"The pair is rebounding and should post further advance," say Trading Central.

The Big Event

As mentioned above, this is a big day for sterling. The Bank of England is expected to announce it will tie their plans for interest rate changes to a threshold.  

"We already know that the central bank has an inflation target of 2.0% but they may take a page out of the Federal Reserve's book and introduce an unemployment rate target of 7%," says Kathy Lien at BK Asset Management.

For Lien 7% is critical to GBP's future performance.

Anything below here could see an acceleration of the current Euro / Pound exchange rate rally:

"The impact on sterling would be significant if the central bank targets unemployment lower than 7%.  With the current rate of unemployment at 7.8%, a lower unemployment target would imply that the central bank plans to keep rates on hold for the next 2 years.  Sterling could also give up its recent gains if the central bank says that interest rates will be not be increased if inflation is less than 1.5% which would be a further commitment to low rates."

Chris Walker at Barclays also believes tying policy to unemployment would be GBP/EUR negative:

"Given that both the IMF and the OBR do not expect unemployment to move below 7% until 2017, any announcement of along these lines may therefore be interpreted by the market as a signal of looser policy for longer."

What would cause the British Pound to rally against the Euro?

According to analyst Chris Walker at Barclays the likelihood of tying policy to the unemployment rate is unlikely:

"Our economists view the most extreme scenario as announcing a threshold on the unemployment rate but also committing to actively reaching that threshold through policy – an effective Fed-style dual mandate. This would potentially open the door to further QE and would likely be interpreted by the markets as a significantly dovish move. We do not view it as likely

"We would expect the market to be somewhat disappointed with a forward guidance framework based simply on a conditional time horizon. Use of the unemployment rate as a threshold has been widely highlighted and should a time-based approach be used instead, we would expect the pound to rally."

The base case at Barclays is for forward guidance in the UK to take the form of a conditional commitment to keep the bank rate at its current (low) level until some economic criterion is met.

"The choice of unemployment rate to use as part of the guidance (assuming it is used) will be the main risk factor for the pound," says Walker.