The BOE decision is coming up this week!
Will they hike interest rates again as expected?
Here’s what you can expect for the event and how you might be able to make pips from it.
Event in Focus:
Bank of England Monetary Policy Statement
When Will it Be Released:
May 11, Thursday: 11:00 am GMT
Use our Forex Market Hours tool to convert GMT to your local time zone.
Expectations:
BOE to hike interest rates by 0.25% from 4.25% to 4.50%
No changes to asset purchases expected
Market players are counting on another 0.25% interest rate hike from the folks over at the Bank of England, as the economy continues to grapple with stubborn inflationary pressures.
Just as in their earlier decision, a couple of dovish dissenters are expected to vote for no change in the benchmark rate while the rest are likely to push for an increase.
The minutes of their policy meeting and the Monetary Policy Report, as well as BOE head honcho Bailey’s speech scheduled for 11:30 am GMT, would provide more insight on their decision and whether or not they’d carry on with this pace of tightening in the coming months.
Relevant Australian Data Since the Last BOE Statement:
🟢 Arguments for Hawkish Monetary Policy / Bullish GBP
March headline consumer price index fell from 10.4% to 10.1% year-over-year versus expected 9.8% figure, still well-above annual inflation target
March core consumer price index held steady at 6.2% year-over-year instead of dipping to the 6.0% consensus
Average earnings index for three-month period ending in February held steady at 5.9% instead of declining to the projected 5.1% reading
April flash services PMI improved from 52.9 to 54.9 to reflect faster pace of industry expansion versus estimated 52.9 reading
🔴 Arguments for Dovish Monetary Policy / Bearish GBP
February monthly GDP showed no growth instead of the projected 0.1% expansion, January figure upgraded from 0.3% to 0.4%
March retail sales tumbled by 0.9% month-over-month versus estimated 0.5% dip, previous reading downgraded from 1.2% to 1.1% to reflect slightly weaker consumer spending
March claimant count increased by 28.8K instead of declining by 2.5K, previous reading revised to show larger increase in hiring of 18.8K from initially reported 11.2K figure
March BRC retail sales monitor held steady at 4.9% year-over-year instead of improving to the estimated 5.1% figure, pointing to stagnating consumer spending
April flash manufacturing PMI fell from 47.9 to 46.6 to signal faster pace of industry contraction versus estimated 48.3 figure
Previous Releases and Risk Environment Influence on GBP
Feb. 2, 2023
Overlay of GBP Pairs: 1-Hour Forex ChartOverlay of GBP Pairs: 1-Hour Forex Chart by TV
Action / results: BOE policymakers voted 7-2 for a 50 bps interest rate hike to 4.00%, but sterling had a bearish reaction to the announcement.
While Governor Bailey did mention signs of a potential peak in inflation rates, he also reiterated that the BOE would continue to tighten until they were “absolutely sure” inflation was cooling down, likely fueling recession speculation ahead for the U.K.
Risk environment and Intermarket behaviors: Risk sentiment was pretty shaky throughout the week since traders had to contend with multiple central bank statements lined up. Overall, intermarket behavior was less correlated than usual, moving more on individual asset stories and central bank developments.
Dec. 15, 2022
Action / results: The BOE hiked the key interest rate by 50 bps to 3.5% and hinted that there is more to do. However, sterling still had a bearish reaction to the event, possibly on comments from Governor Bailey suggesting that high inflation conditions may have peaked, signaling the possibility of a top in the interest rate hiking cycle.
Risk environment and Intermarket behaviors: It was a strong risk-on start to the week, possibly due to traders’ expectations of that central banks may signal peak inflation conditions / rate hike cycle. Unfortunately for risk-on bulls that sentiment soured when the FOMC signaled more hikes coming for 2023 and hawkish hikes from the Bank of England and the European Central Bank.
Price action probabilities
Risk sentiment probabilities: The most likely driver of broad sentiment this week will be the April consumer inflation read from the U.S. on Wednesday (barring any major news surprises). Expectations are for the headline read to slightly pick up pace while the core inflation read is expected to show a slowdown.
Stronger-than-expected numbers may lead to higher odds of aggressive Fed monetary policy rhetoric, why may induce risk-off behavior short-term and vice versa.
This may have an influence in Sterling price behavior short-term if we don’t see a big surprise from what is expected from the BOE on Thursday. If that’s the case, risk-off vibes may draw in sellers into Sterling against safe havens like JPY and CHF, while risk-on flows may manifest into Sterling gains against those same currencies.
British pound scenarios
Base case: Another interest rate hike from the BOE has been priced in for quite some time already, as policymakers pretty much have their hands tied to their price stability mandate.
However, central bank officials are likely to stress that the consumer sector has already been taking huge hits from higher borrowing costs, which may prompt “slower pace” rhetoric or the low probably scenario of the BOE signaling a pause ahead.
An increase in dovish votes from MPC members could mean that the odds are tilting in favor of a tightening pause in their next decision.
If that’s the case, the BOE may join the likes of the Fed when it comes to having no choice but to rethink their tightening plans. This would put GBP on much bearish footing against currencies with relatively hawkish central banks like EUR and NZD.
Alternative Scenario: BOE Governor Bailey and other hawkish members may reiterate the need to act fast when it comes to fighting inflationary pressures, dashing hopes of pausing or cutting anytime soon.
Don’t forget that updated growth and inflation forecasts are also up for release, so any significant upgrades to these figures would increase the odds of more tightening moves from the U.K. central bank.
In this scenario, the pound may resume its rally against currencies with dovish central banks like the Japanese yen, or those who would be hurt IF risk sentiment shifted back to risk-off like in NZD, which has been in a
