GBPUSD is moving in an Ascending channel and the market has fallen from the higher high area of the channel
The Bank of England is expected to raise interest rates by 25 basis points at its meeting this week due to double-digit inflation in the UK. The UK inflation target of 2% is now 5 times higher at 10.1%, so wage growth and consumer spending will slow by adding hikes in the coming quarters. The UK unemployment rate is low, and the UK Manufacturing PMI was positive last week.
In the coming months, financial markets are expecting the Bank of England (BoE) to diverge from other institutions such as the Federal Reserve and the European Central Bank.
Investors believe that the BoE still has three more rate hikes left to do this year, despite the market moving closer to the Fed’s predicted pause and rate decrease by the end of the year. A portion of this discrepancy can be attributed to recently released data on wages and inflation, both of which were higher than anticipated. However, will the BoE actually resemble the Fed in such a different way?
Bank of England’s Divergence from FED and ECB
There are two causes behind the belief that the BoE will diverge from other institutions. First, this divergence story seems to run counter to what the Bank has recently been saying. The Bank has been stating since February that the economy will continue to be significantly impacted by previous rate increases. It stated that additional tightening will depend on indications of “more persistent” inflationary pressures. Second, despite early impressions, the current data was not quite as bad for the BoE.
EURGBP is moving in an Ascending channel and the market has reached the higher low area of the channel.
The most recent month’s outperformance followed two months where regular pay climbed at a considerably slower rate than witnessed throughout 2022. Wage growth has been erratic. When we take this volatility into account and compare the three months’ worth of pay increase to the three months prior, the growth is still significantly less than it was.
Inflation Forecast and the Impact on the Economy
It is true that the headline Consumer Price Index (CPI) is almost a full percentage point higher than what the Bank of England expected in February in terms of inflation. However, this is primarily due to more pronounced increases in food prices as well as some unexpected stickiness in core goods inflation.
Both trends are unlikely to endure very long, and services inflation, which is typically far less volatile and more durable, has exactly followed the BoE’s forecast. The BoE’s own “Decision Maker Panel” survey of CFOs has consistently shown that over the past few months, there has been less pressure on prices and wages as well as less hiring challenges. This data has historically been given a lot of weight by policymakers.
Revised Predictions on Tightening Cycle
It is probable that the revised predictions will give strong indications that the tightening cycle has run its course. Watch the Bank’s inflation prediction for the following two years. When it comes to that time frame, BoE policy is most influential, and in February, that forecast was perceived as being far below target.
GBPJPY is moving in an Ascending channel and the market has reached the higher low area of the channel.
Forecasts for growth should be revised upward, and estimates for the unemployment rate should be revised downward, partially as a result of the decision to abandon the planned increase in energy costs in the second quarter.
Impact on Gilts and Sterling Rates
Generally speaking, a change in BoE policy determines how much bonds are valued. It makes sense to have some degree of divergence with other developed rate markets.
The hike in GBP rates came without much support from the Bank of England and with economic data that did not deviate significantly from its prediction. This suggests that the recent increase in sterling rates and the recent widening relative to the dollar should not immediately reverse if the BoE remains ambivalent about its next course of action.
Government Issuance and the Hurdle for Gilts and Sterling Rates
The substantial rise in government issuance this fiscal year over last presents another hurdle for gilts and sterling rates.At the very least, we would anticipate this to raise gilt yields to the Sonia swap rate, but it will also demonstrate the convergence of sterling rates that are lower than their equivalents in the US dollar.
Possible Outcomes of the Bank of England Meeting
The Bank of England monetary policy meeting on Thursday will have a significant impact on the short-term sentiment around the Sterling Pound and provide the GBP/USD pair a new directional push.
GBPAUD is moving in an Ascending channel and the market has reached the higher low area of the channel
However, there are several possible outcomes of the meeting.
Data-based Guidance
Expect the Bank to keep its data-based guidance, which suggests further tightening may be feasible.However, the obvious dovish risk is that the Bank “does a Fed” and waters down this guidance even more, possibly deleting the part about further tightening.
In either case, it is probable that the revised predictions will give strong indications that the tightening cycle has run its course.
Vote Split Results
The previous time, seven members voted for a 25bp increase and two against it. Based on previous remarks, there is undoubtedly a chance that one or both of the doves will vote in favour of a rate drop during this meeting.
GBPCHF is moving in the Descending triangle pattern and the market has reached the lower high area of the pattern.
That might lead to an uncommon, though not unheard-of, three-way split. Even so, it is evident that the “core” five or six committee members tend to move in unison, thus regardless of the choice, the vote is not going to be particularly close.
Conclusion
The Bank of England monetary policy meeting will provide important insights into the BoE’s stance on further rate hikes. While the market expects further tightening, recent data and the Bank’s own forecasts suggest that the tightening cycle has run its course. There is a possibility of a vote split and a dovish outcome, but regardless of the choice, the vote is not expected to be particularly close. The impact on sterling and gilts will depend on the BoE’s next course of action, but the upward path for spot prices is the one that will encounter the least amount of opposition in the short term.
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