The BOE decision is right around the corner!
Will they stick to their recent pause rhetoric or will recent signs of sticky high inflation bring back hawkish vibes?
Here’s what the U.K. central bank might have up its sleeve and how pound pairs might react.
Event in Focus:
Bank of England Monetary Policy Statement for September 2023
When Will it Be Released:
September 21, Thursday: 11:00 am GMT
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- The Bank of England is expected to hike interest rates by 0.25% from 5.25% to 5.50%
- The Monetary Policy Committee is likely to vote 7-2 in favor of tightening vs. holding
Relevant U.K. Data Since the Last BOE Statement:
🟢 Arguments for Hawkish Monetary Policy / Bullish GBP
U.K.’s jobless claimants are lower from 29K to 0.9K; Average wage growth was higher at 8.5% record high in July
U.K.’s average weekly earnings including bonuses up by 8.2% y/y in the three months to June, marking the fastest increase since July 2021
🔴 Arguments for Dovish Monetary Policy / Bearish GBP
U.K.’s GDP surprisingly contracted by -0.5% m/m in July (vs. -0.2% expected, 0.5% previous)
U.K.’s unemployment rate ticked higher from 4.2% to 4.3% in August; net jobs change was -207K, far below -80K forecast
At the Bank of England Monetary Policy hearings to U.K. Parliament on Sept. 6th, Governor Bailey told lawmakers that they are no longer in a phase where it was clear that rates needed to rise and that policy is restrictive.
S&P Global / CIPS UK Services PMI for August moved lower to 49.5 vs. 51.5 in July; Employment and Input Prices Indexes continue to trend lower but remain relatively strong; Manufacturing PMI slipped to 42.5 vs. 45.3 previous
U.K.’s producer input prices fell by -3.3% y/y in July, down from June’s -2.2% y/y decline. Output (factory) prices also fell by -0.8% y/y from a +0.3% y/y increase in June.
Previous Releases and Risk Environment Influence on GBP
August 3, 2023
Event Results / Price Action:
In August, the Bank of England raised its key interest rate by 25 bps as expected to 5.25% and warned that interest rates will likely stay high for some time. There was an immediate bullish reaction in the British pound as the market didn’t get the “dovish hike” some were expecting. Aside from the “higher for longer” interest rate environment warning, eight members voted for the hike vs. an expected seven members out of the nine.
Risk Environment and Intermarket behaviors:
Mixed economic data results and headlines lead to mixed price action and sentiment for this week as bond yields and the U.S. dollar saw green, while crypto, equities and gold trended lower.
This was likely due to traders pricing in high interest rate expectations (global PMIs continued to flash rising cost burdens for businesses), and that those high rate expectations would likely drag global growth lower ahead (signaled by lower business activity updates from China and Europe).
This was also the week where Fitch downgraded U.S. long-term credit grade from AAA to AA+, sparking quick fears on the financial stability of the U.S.
June 22, 2023
Action / results:
Sterling was on weak footing prior to the BOE decision, as stronger than expected U.K. inflation data prompted speculations that more aggressive tightening moves could bring the economy closer to a recession.
Still, the BOE took the markets by surprise when they announced a 0.50% interest rate hike instead of the widely-expected 0.25% increase.
Because of that, the pound managed to recoup some its post-CPI losses and even extended its gains when the U.K. economy printed strong consumer sector data, which soothed investors’ growth concerns.
Risk environment and Intermarket behaviors:
Hotter than expected inflation had been the prevailing market theme for the most part of the week, causing traders to worry about higher borrowing costs ramping up recession risks.
Risk-off flows were already in play after Goldman Sachs cut its growth forecasts for China while the China State Council announced vague economic support measures. It didn’t help that global flash PMI readings came in mostly weaker than expected on Friday, dragging higher-yielding assets further south.
Price action probabilities
Risk sentiment probabilities:
Just like that July shindig, this week’s trading calendar is jam-packed with all sorts of action to influence broad risk and U.S. dollar sentiment.
By the time we get to the Bank of England rate decision, the two potentially biggest drivers of broad risk will have come and gone: an update to China’s Prime Loan Rates and the Federal Reserve’s latest monetary policy statement.
Current expectations are for China to hold off of lowering those prime loan rates and the Fed is expected to pause its rate hiking cycle once again, but the likely catalyst for a shift in broad risk sentiment will likely be if they give a hard signal on the next rate hike (low probability scenario at the moment).
So, no definitive bias lean on risk sentiment before and during the event, but after the BOE event, we’ll get the latest flash global PMI updates on Friday. That would likely give us a more uniform risk sentiment move.
Expectations are for the surveys to give traders some signs of contractionary conditions possibly bottoming out, which may potentially spark risk-on vibes ahead of the weekend.
British pound scenarios
Potential base case:
U.K. economic data has shown signs of weakening, and likely why the Bank of England told U.K. Parliament that it’s not clear rate hikes are still needed back in August. But high wage growth rates continue to remain sticky, as well as business survey prices sentiment.
And with global inflation updates generally coming above previous reads, it’s all pointing to a potential rebound in the upcoming U.K. CPI update tomorrow.
If U.K. CPI does come above forecasts, this could make the case for the BOE to give us a slightly more hawkish stance than what they gave Parliament earlier this month, an event that basically knocked Sterling lower against the majors ever since.
If a more hawkish than expected statement from the BOE scenario does play out (e.g., open to further hikes again, 9-0 vote to hike, slow down in the rate of gilt sales, etc.), that would likely draw in a mix of fundamental shorts taking some profit, and likely some fresh technical Sterling buyers who’ve been watching the pullback against weaker currencies its been trending higher against.
In that scenario, wait to see if Sterling does break out higher and sustains gains before considering your own long position risk management plans.
Potential alternative scenario:
If U.K. CPI comes inline or below expectations and/or previous reads, then it’s possible the BOE stays with the stance that rates are no longer needed and that monetary policy is restrictive enough.
This isn’t likely to spark fresh Sterling shorts after the huge downtrend we’ve seen in the past two weeks; it’s more likely to trigger a “buy-the-rumor-sell-the-news” reaction, which means a potential bounce on some profit taking.
This reaction would likely be short-lived as seen in the past two BOE statements as traders would likely quickly move to focus on global flash PMIs and/or influences that may have risen from the FOMC event.
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