BOE To Hold Amid Shifting Outlook

The BOE is widely expected to keep rates unchanged, but key data ahead of the meeting and a shifting outlook on price pressures could generate increased volatility around the event.

The Key Points Moving the Market

• BOE is almost certain to keep rates unchanged, with the focus on signals for policy direction for later in the year.
• Economists are divided on the outlook amid uncertainty over inflation pressures as the Strait of Hormuz reopens.
• UK May inflation is expected to rise but could be old news unless the core rate signals that price pressures are more sticky than thought.

BOE On Hold, For now

The market is pricing in a hold at the Bank of England's policy decision on Thursday, and economists are unanimous in that view, according to the most recent Reuters poll. There is considerable debate on what happens next, and what the bank could signal for the future could shake up the pound. Most economists expect the BOE to keep rates steady for the rest of the year, although an increasing number are now suggesting a hike. There is also a small minority who see a cut. However, this poll was conducted before the announcement that the US and Iran had reached a tentative deal to open the Strait of Hormuz by Friday. Already, both sides report that ship passages are increasing, as the market becomes increasingly optimistic that energy supplies will normalise soon. Goldman Sachs was among the first major brokerages to cut its price target for crude, saying it expected the market to normalise by mid-July.

How quickly crude prices will fall, and how quickly that will translate into a reduction in inflationary pressures, remains uncertain, complicating the BOE's policy outlook. This means that Governor Andrew Bailey might try to keep all options on the table, and the lack of clear guidance could leave the market without a clear signal to react. To further complicate things, key data that could influence the bank's decision comes out just hours before the meeting ends. That includes Wednesday's May CPI reading, expected to jump to 3.1% from 2.8% on the headline. The core rate is expected to rise to 2.6% from 2.5%, suggesting inflationary pressures are building. Then on Thursday, the April employment change is expected to slow to 80K additions from 148K a month earlier. However, the unemployment rate is anticipated to stay unchanged at 5.0%. A major shift in that data could affect how the BOE signals its outlook, particularly if inflationary pressures are lower than expected. That could give the central bank more room to stay on the easing side until the situation with the Strait of Hormuz is clarified.

Cable Looking for Direction

The GBPUSD has been trading generally sideways ahead of major risk events this week, with the Fed and BOE meetings scheduled within 24 hours of each other. The key factor is whether the US-Iran deal is upheld, as higher energy prices are the main driver of BOE hawkishness. In the absence of the conflict, the question becomes when the BOE will ease next, while the Fed is seen on a more hawkish track, which could put pressure on the cable. But if UK inflation or jobs numbers are higher than anticipated, this could keep the BOE on hold and support the currency. A more unanimous vote at the BOE could indicate that the bank is waiting for more information before acting, while a divided vote could indicate whether the BOE will resume hiking or cutting, depending on where the dissenters land.

GBPUSD Range Tightening Hints at Breakout

Following the double bottom bounce off the 1.3300 handle, sterling’s upside has been contained within a tightening range, which may or may not be part of an ending triangle formation pending a breakout. If the BOE is perceived as more hawkish than markets expect, reclaiming 1.3500 could open the door to 1.3660 if the triangle trendline gives way to bulls, exposing the 1.3870 peak in the medium term. However, a dovish BOE, combined with poor economic data, could revisit the lower VWAP of 1.3330 and pave the way for 1.3250, near the lower trendline.

Source: SpreadEx | GBPUSD, Daily Chart