A hawkish hold from the BoE?
The Bank of England will give its rate decision at the conclusion of the two-day Monetary Policy Meeting on Thursday at 12:00. Just one month ago investors were pricing in an almost 90% probability of the BoE hiking rates in May, yet after a month of weak data and a dovish sounding BoE Governor rates are widely expected to be kept on hold.
Data turned particularly sour across the month of April. Inflation ticked lower to 2.5% as it continues to move towards the central bank’s target 2%. Whilst on one hand falling inflation means the BoE will be more cautious about hiking, on the other it theoretically means that the squeeze on the consumer is easing. Wage growth remained constant at 2.8%, less than expected but still ahead of inflation, pointing to a theoretically less pressurised consumer. However, the reality has been slowing retails sales, a deteriorating high street and a quarter with the weakest economic growth since 2012 suggesting that the economy is far from in recovery mode.
As a result, odds for a rate hike at this months meeting have tumbled and are now sitting at less than 10%. Therefore, it is not what the BoE does on Thursday, but what they will say that will dominate headlines and determine the fate of the pound.
The pound has been displaying a very all or nothing attitude towards BoE monetary policy suggesting that investors are looking for much more clarity from the central bank. Sterling reached $1.43 last month on optimism of a May hike; Currently the pound appears to be pricing in a dovish inflation report and a weak GDP outlook with little prospect for further hikes this year; as a result, the pound was languishing at $1.35 ahead of Super Thursday, after wiping out all of its gains versus the dollar this year.
Pound to $1.36?
The pounds reaction will depend on whether the BoE delivers a hawkish hold or whether it suggests that the recent souring economic data is the beginning of a longer term down trend. Whilst the GDP data was hugely disappointing growing just 0.1% quarter on quarter, a good deal of the data and modelled data are linked to unseasonable cold weather supporting the idea that the weak prints were likely to be one off’s rather than a more serious structural change in the economy. If so, there is a good chance that the pound has overcooked the sell off. Investors will be looking for signs from of the BoE playing down any recent weakness in the economy.
Markets will be watching the inflation report for clues. Whilst labour data has remained strong with solid earnings growth, rising oil prices will be offset with a stronger pound. Therefore, we expect the inflation forecast to remain roughly constant.
Investors are pricing in a 60% probability of an August hike. If the central banks suggests that the tightening cycle is still on track then we could see GBP/USD look to take back $1.36.