Open positions for GBP/USD and EUR/GBP according to BoE meeting’s outcome
The Bank of England meeting is the week’s highlight for the British pound. Although none of 38 Bloomberg experts expects it to raise the Bank Rate higher than the current 0.5%, investors will be carefully following the regulator’s rhetoric. Is it going to ignore poor statistics and continue monetary normalization? Will it refer to the increased political and other risks and follow the tactics “wait and see”? According to TD Securities, Mark Carney’s dovish speech will suggest selling GBP/USD, the hawkish one -going short for EUR/GBP.
The key issue of MPC meeting in June is not the number of votes for the interest-rate increase (it is expected 2 against 7), but BoE willingness to hint at the monetary restriction in August. Currently, the derivative market suggests 45% probability of this scenario, 10 bps lower than a month ago. Bloomberg economists doubt as well. A little less than 55% of them are willing to believe in monetary restriction in August. The previous survey featured 60%.
Dynamics of interest-rate hike probability
Ahead the BoE meeting in May, the two thirds of the popular media’s respondents changed their opinions because of poor statistics and Mark Carney’s hints at the regulator’s will to pause a little. The latest data on the UK economy have been mixed. Gradual rise of PMI and a good pace of retail sales add benefits to the BoE that thinks the weak start of the UK GDP to have resulted from seasonal factors, including bad weather. It is supported by Bloomberg experts, who expect the economy expansion to speed up to +0.4% QoQ in April-June. It should expand by 1.3% on a yearly basis, slightly lower than the previous forecast (1.4%).
On the other hand, the worst performance of industrial production for the last 5.5 years, problem of construction industry and a slower growth of average wages suggest the central bank should be passive. At first sight, it can well afford to think for a while before it acts.
Dynamics of wages and inflation in UK
I suppose, the Bank of England, unlike its most colleagues, issuing G10 currencies, is interested in the strong pound. In theory, oil bullish market and GBP/USD 8.6% surge since mid-April makes CPI more likely to be at 3% again. In fact, the regulator should be more worried about the EUR/GBP trend and the trade-weighted Pound Sterling. Euro consolidation helps it stay sensible.
In my opinion, the BoE would like investors to remain confident in the monetary normalization advancement. If they don’t, massive sales of pond will make it extremely difficult for the regulator to get the inflation rate back to its 2% target. Therefore, the hawkish rhetoric grows more likely, which can result in GBP/USD stabilization and EUR/GBP drop towards the support at 0.87. Its breakout will open the pair’s way down.
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Price chart of GBPUSD in real time mode
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