BOE Set to Resume Rates Cuts

Markets believe the BOE is back into the easing game after the inflation drop and a slowing economy, but more easing beyond that is doubtful.

Focus on the MPC Split

Markets believe the BOE will resume its easing policy after a hold in December, with a 25 basis point rate cut at 90% on Thursday. This would mark the third cut in the easing cycle to 4.5%. While it is largely priced in, markets will want to see the voting split among MPC members. Last time, three members voted for a cut versus an 8-1 split expected this time around. The division would provide clues about the likelihood of further easing.

It has been weeks since the markets began expecting the resumption of rate cuts as inflation figures have moderated and economic growth has slowed. Paradoxically, this has boosted the FTSE 100 over the past month while weighing on the pound. Cable has been trending lower since November, with persistent inflationary pressures in the US contrasting with the UK's, paving the way for the BOE to catch up with the ECB.

Inflation Projection Priced in?

With a rate cut largely priced in, the focus will be on comments by Governor Andrew Bailey and economic projections for clues on further easing in the short term. Downward revisions to growth and inflation forecasts could signal more rate cuts, as recent data has worsened since the previous projections. However, a strong wage growth and a tight labour market, which could keep services inflation high, introduce uncertainty around the extent of future easing.

The market currently prices in two to three additional rate cuts. However, if the BOE downgrades its inflation outlook more than anticipated, this could shift to three to four cuts, potentially weakening the pound. Conversely, if the BOE's inflation projections disappoint, it could provide a boost to sterling as the recent decline suggests the market has already priced in a reduction in the inflation outlook.

Cable iH&S Hints at Upside

GBPUSD might have completed a potential inverse head-and-shoulders (iH&S) pattern, suggesting a trend reversal above the neckline near 1.25. A break above the neckline resistance could open the door to 1.30, projected by the measured move (distance from head to neckline). Interim resistance levels can be seen at 1.26 and 1.28. However, the recent test of the said resistance raises the probability of short- or longer-term declines. Support below 1.24 lies at the 1.2250 swing, which may still act as a corrective bottom.

Source: SpreadEx / GBPUSD

Key Takeaways

The BOE is expected to deliver a 25 basis point cut amid cooling inflation and slowing economic growth. While priced in, revised inflation and growth forecasts and post-event comments will be scrutinised for clues about the extent of future easing. A strong wage growth and a tight labour market introduce an extra layer of uncertainty. The market currently prices in just two to three additional cuts, though a substantial downward revision to the inflation outlook could prompt calls for more aggressive easing and weigh on sterling.