Bank of England decision coming this week!
Will they raise interest rates again as expected?
Here’s what the BoE might have up its sleeve and how the GBP crosses might react.
Focus on the event:
Bank of England monetary policy statement
When will it be released:
June 22, Thursday: 11:00 a.m. BST
Use our forex market hours tool to convert GMT to your local time zone.
Expectations:
- Bank of England raises interest rates by 0.25% from 4.50% to 4.75%
- No changes expected to purchase assets
- Minutes of the MPC meeting show a 7-2 vote in favor of tightening
Sterling traders are counting on another 0.25% interest rate hike from people at the Bank of England, as the British economy struggles to fend off stubborn inflationary pressures.
This could mark their 13th (and number!) consecutive tightening move, which will raise the benchmark interest rate from 4.50% to 4.75% – its highest level since April 2008.
the Minutes of their policy meeting Due around the same time the announcement will provide more insight into their decision and whether or not to continue this pace of tightening in the near term.
Just as in their decision in May, two dovish opponents (Dhingra and Tenreyro) are expected to vote for no change in the benchmark rate while the rest are likely to push for an increase. Rumor has it that an extremely hardcore member might even vote 0.50% this time.
Relevant UK data since the last BoE statement:
🟢 Bullish monetary policy arguments / bullish GBP
average income index It accelerated from an upgrade of 6.1% to 6.5% during the three-month period ended in April versus 6.1% expected, keeping risks of a wage spiral in play.
Claims may count Showing a decrease of 13.6K in unemployment vs the expected increase of 21.4K, April read revised to show a smaller increase of 23.4K in unemployment vs the initially announced figure of 46.7K
BRC shop price index It rose 8.8% year-on-year to 9.1% in May to reflect a record increase in retail prices
April retail sales It recovered 0.5% m/m from the previous decline of 1.2% versus an estimated increase of 0.3%, indicating resilience in the consumer sector.
CPI address may Decreased from 10.1% yoy to 8.7% vs. 8.2% consensus Core CPI increased from 6.2% to 6.8%
🔴 Arguments for pessimistic/bearish monetary policy for the GBP
consumer inflation expectations It fell from 3.9% to 3.5%, indicating a slowdown in inflationary pressures over the next 12 months.
May PMI Services It fell from 55.9 to 55.2 and the manufacturing PMI fell from 47.8 to 47.1, reflecting a slowdown in the industry.
April manufacturing and industrial production It recorded a decrease of 0.3% versus the estimated decreases of 0.1%.
Previous issues and the impact of environmental risks on the pound sterling
May 11, 2023
Action / Results: The Bank of England raised rates by 0.25% as expected, with Monetary Policy Committee members maintaining a 7-2 split in voting to increase rates or pause.
The monetary policy report showed upgrades to inflation expectations from 3.92% in the February announcement to 5.12% by the end of 2023 and from 1.42% to 2.28% for the end of 2024.
In addition, BoE Governor Bailey stated that “if there is evidence of further (inflationary) pressures continuing, further tightening of monetary policy will be required.”
Sterling flipped and turned during the BoE’s decision as the central bank also joined the “cautious rally” bandwagon by easing its forward guidance.
An overall downtrend for the GBP followed when Governor Bailey mentioned in a post-press interview that he was approaching a point where the central bank could “relax in terms of the price level”.
Later in the week, a downbeat monthly GDP reading fueled expectations of a tightening pause and perhaps even the possibility of a rate cut if economic data worsens.
Risk Environment and Intermarket Behaviors: Positive risk sentiment from the previous trading week has set the stage for a good start among the higher yielders.
It wasn’t long before risk-off flows returned, although investors once again turned their attention to US debt ceiling problems and relatively dovish central bank announcements.
It didn’t help that downbeat data from China that came out later in the week, along with another US regional bank reporting a drop in deposits, which then contributed to the risky asset sell-off.
March 23, 2023
Action / Results: The Bank of England raised interest rates by 0.25% in a 7-2 vote, although Governor Bailey hinted that the economy could see lower price levels for the rest of the year.
Prior to that, the pound managed to rebound from a weak start when the headline UK CPI for February jumped from 10.1% to 10.4% y/y vs. the expected drop to 9.9%.
The dovish hints from the BoE governor seemed to linger in traders’ minds, even though the pound fell against the dollar, yen and franc for the rest of the week.
However, risk aversion flows further weighed on commodity currencies, allowing the British currency to recoup most of Friday’s post-BoE losses.
Risk Environment and Intermarket Behaviors: Problems in the banking sector were the dominant theme early in the week, as traders took wind of the failed attempt by central banks to boost confidence in the financial sector.
Although Treasury Secretary Yellen was reassured that regulators were willing to take steps to avoid a complete collapse, she also made it clear that the government was not considering “universal insurance” for uninsured deposits.
This led to another flight to safety in the middle of the week, along with a “downbeat rally” from the Fed that kept traders concerned about a potential recession. Risk flows continued when share prices of Deutsche Bank and UBS fell, further challenging traders’ confidence in the banking sector.
price movement probabilities
Possibilities of feeling risky: Risk appetite seems to have started to be volatile this week, as stocks and commodities are in the red after major financial institutions cut their forecasts for Chinese growth.
Looking ahead, risk sentiment and volatility conditions are likely to be affected by central bank events this week, most notably Fed Chair Powell’s testimony to Congress (if we see any surprises there). Also, if we see similarities between the SNB’s, BoE’s and Fed’s rhetoric on inflation/growth, see this week, that could lead to more continuation of directional moves to risk as the uncertainty around those events passes.
British pound scenarios
Base case:
the May UK CPI The report will be released a day before the BoE’s interest rate statement, and if the actual numbers differ significantly from forecasts, that could change expectations for the BoE’s June decision, as well as spur significant volatility in Sterling ahead of the event.
Assuming that the UK CPI is in line with expectations and leads to little volatility in the GBPa 0.25% rate hike from the BoE is the likely outcome of the event and we may hear remarks that policy makers may not be so concerned about the risks of stagflation this time around.
Given that this scenario has been likely to price for a while based on GBP’s strong performance against the majors so far this month, this scenario could attract more profit-taking on GBP’s long positions against the new bulls, possibly pushing it lower. during the session.
Of course, we also need to pay attention to Governor Bailey’s speech as well as the MPC votes, as that will likely have a bigger impact on sentiment if we see the expected 25bp rise. A shift to a more hawkish tone compared to their previous announcements and/or more tightening voting MPC members (or larger rallies) could entice fundamental/news traders to buy GBP in the session.
If this happens, it would likely be a strong sterling long setup to consider against currencies with pessimistic central banks such as the Japanese yen and the New Zealand dollar. A continued environment of risk aversion flows could catalyze gains for GBP against higher yielding commodity currencies in this case.
Still, next UK CPI release for May It could set the tone for the BoE’s June decision, as another bullish surprise in the inflation figures could raise the odds of more aggressive tightening moves and drive bullish sentiment for the British pound ahead of the BoE’s statement.
Alternative scenarios: There is a slight possibility that BoE Chairman Bailey will choose to focus on weaker inflationary pressures in the future, setting the tone for potential tightening pause later in the year.
If this sentiment is reflected in the MPC meeting minutes, the pound could abandon currencies with more hawkish political biases such as the Australian dollar and the Canadian dollar. In addition, continued risk aversion could mean short-term opportunities for GBP sellers against lower yields such as the US dollar and Swiss franc.
Also, if the UK CPI update for May differs too much from expectations, then short-term volatility is likely to pick up significantly in the pound and weaken the base case scenario discussed above. In this case, it is a good practice to wait for the Bank of England’s full monetary policy statement, and see the outcome and market reaction. After the initial fluctuations and volatility, this scenario is likely to lead to a sustained directional movement for a session or two as traders re-introduce new information and new expectations.