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On Thursday 1st August at 1200 BST/ 0700 ET the Bank of England will announce its latest policy decision, the second one under the stewardship of new Governor Mark Carney. The market expects no change in interest rates or in the bank’s asset purchases. Currently the market is only pricing in 5 basis points of cuts for this week.
We agree with consensus. The economy has picked up and the July PMI data is expected to increase or remain close to elevated levels, particularly in the service sector. The Lloyds Business Barometer for July increased to its highest level since 2010, while mortgage lending has also started to pick up. Thus, we think that the BOE will want to store some ammunition in case the economy takes a turn for the worse in the coming weeks, and thus it won’t waste a precious rate cut when the June service sector PMI hit its highest level since 2011.
So what can we expect from this month’s meeting:
Forward Guidance: Unlikely, since the minutes of the last meeting said that a decision on forward guidance will be announced at the Inflation Report press conference on 7th August.
Statement: Maybe. The BOE released a statement at its July meeting, which is unusual. We still don’t know if this is a permanent change in the BOE’s communication strategy under Mark Carney. If we do get a statement then the Bank may use it to signal its decision regarding forward guidance before it is formally announced in the Inflation Report. However, we think details, including time frames and threshold guidance, will not be announced this Thursday.
Policy tools: We still don’t know what the Bank will do to boost the economy. More QE looks like it is off the table for now after all members voted to keep purchases unchanged at the July meeting. The weakest link in the UK economy remains lending to small businesses and unsecured lending to individuals. Thus, the Bank may be able to target this with an extension in size, scope or duration of its Funding for Lending joint venture with the government. However, the more likely forum to announce any change to the FLS programme is the in the Inflation Report next week.
Economic outlook: we expect the Bank to acknowledge some of the bright spots in the UK’s economy over the past month, but to be vigilant for the downside risks including rising inflation.
Potential market reaction:
The BOE meeting probably has the highest event risk of all the central bank meetings this week as there are a host of unknowns due to the new Governor, Mark Carney. Does he favour QE and was his vote against more it a one off in July? How keen are the rest of the MPC on forward guidance, some had spoken out against it for the UK, can Carney make them change their minds? Also, will new deputy governor Sir John Cunliffe, who joins in November, share the Governor’s viewpoint? They are good friends, after all…
At the last meeting the market sold the fact and then bought the fact… GBP sold off on the back of the BOE statement and then rallied again on the back of the minutes released 2 weeks later.
Here are some potential GBP scenarios:
· If a statement is released and it suggests that the BOE will adopt forward guidance although details won’t be released until the Inflation Report, then we could see GBP sell off.
· If there is a statement and forward guidance is not mentioned this may be GBP positive.
· If there is no rate cut and no statement this could also be pound positive in the short term.
Overall, we tend to think that GBP gains are limited due to the huge amount of policy uncertainty related to the August Inflation Report. We think any GBP rallies on the back of Thursday’s BOE meeting may be faded.
One to watch: GBPNZD
With the prospect of forward guidance keeping GBP gains capped over the next week or so, and the RBNZ more likely to tighten monetary policy, GBPNZD may continue to trade lower as a relative monetary policy play.
After finding some support at 1.90 late last week, GBPNZD has been recovering in the last couple of days. However, a dovish BOE could cause GBPNZD to weaken, potentially exposing the cross to a break below key support at 1.8920 – the 200-day moving average. Any rallies towards 1.9310 – the 50-day sma – could be met by a wave of selling pressure.
Watch out for New Zealand business confidence and money supply data overnight, although we think the BOE meeting will be the biggest driver of this cross in the next 48 hours.
Source: FOREX.com and Bloomberg
Kathleen Brooks| Research Director UK EMEA | FOREX.com
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