BOE Expected to Hold Amid Mixed Signals

The BOE is expected to maintain its policy stance as it assesses mixed economic data at home and global uncertainty.

Scrutinising the Vote Split

Economists agree that there will be no change in interest rates at the upcoming BOE meeting on Thursday, with the distribution of votes among policymakers watched closely. Last time around, MPC Member Catherine Mann unexpectedly shifted from a hawkish to a dovish stance and has since maintained her position that the BOE needs to take decisive action to provide clearer signals to the market. Consequently, traders may scrutinise which side of the vote split she aligns with this time around. Analysts and economists appear split on long-term projections given the mixed signals from the British economy, including slowing inflation, light labour markets, rising stocks, and a softening economy.

Markets will be looking for guidance on the BOE's plans for the subsequent meeting, where a rate cut is priced in, which would allow the bank to prepare markets for further easing. Economists expect that the anticipated rate cut in May will be followed by two more cuts, one in August and one in November. While the ongoing trade wars have gathered media attention, their impact on the UK economy has been relatively limited, with the country avoiding targeted tariffs and remaining largely unscathed by global tariffs on steel and aluminium. Yet, investors remain cautious about potential policy changes under Trump that could still affect the UK economy.

Moving Towards Easing

Earlier in the year, markets expected at most two rate cuts but have since shifted towards expecting more easing from the BOE. This shift was reinforced by last week's GDP report that indicated a contraction in the UK economy in January, a surprising development following a strong performance in December. The GDP data in December led to a surge in long-term UK government debt yields as deficit hawks expressed concerns about the government's ability to meet its debt obligations. The UK economy has been sluggish, and defence spending increased substantially.

Nonetheless, the pound has gained ground against the dollar, and UK equities have performed well due to external factors. The general economic uncertainty has driven down US yields and weakened the greenback, while tariffs on metals have supported large mining companies. Europe's move towards increased defence spending has also benefitted the sector in the UK. Given the significant influence of overseas impacts, the pound's reaction to the BOE's rate decision may be muted, with greater focus on the Spring Statement to assess potential government measures to bolster the economy and its own revenue.

Cable Breakout Imminent

Cable appears to be in a sideways market, signalling a potential continuation past 1.3010 and towards 1.3070 when measured from the top. Conversely, a break below 1.2950 may indicate a peak and imminent reversal, exposing supports at 1.2910 and 1.2860.

Source: SpreadEx / GBPUSD

Key Takeaways

The BOE is expected to keep its policy stance unchanged, with the distribution of votes among policymakers closely watched for potential shifts. The central bank may provide guidance on future easing, particularly in light of the recent economic contraction. As external factors may influence the pound's reaction more than the rate decision itself, the government's fiscal measures remain important for the UK economy.