Wednesday, October 5, 2011

BMO Recommendations ahead of BoE and ECB meetings

There are 2 important central bank meetings on Thursday: the one of the Bank of England (with the rate and the amount of asset purchase facility released at 3:00 pm GMT+4) and the one of the European Central Bank (with the rate and the rate released at 3:45 pm GMT+4 and press conference at 4:30 GMT+4).



Analysts at BMO Capital Market note that there may be 4 possible combinations of the central banks’ decisions. Here they are:


-          BoE does nothing, ECB does nothing;
-          BoE increases quantitative easing, ECB does nothing;
-          BoE does nothing, ECB cuts rates;
-          BoE increases quantitative easing, ECB cuts rates.

According to the specialists, the last scenario represents the best trading opportunity. In such case the market may firstly react to the reduction of the interest rate differentials in favor of the UK and the single currency will decline versus British pound. 

However, investors will likely soon realize that the ECB’s action is meant to improve the situation in the euro area. As a result, the European bank equities and euro will advance. So, BMO recommends buying EUR/GBP on the dips, at 0.8550 stopping below 0.8500 and targeting 0.8700.

daily eurgbp 22-32
Chart. Daily EUR/GBP

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