Ahead Of The BOE

February Meeting

The BOE’s “Super Thursday” passed as we anticipated with the BOE voting to keep rates unchanged at 0.50% . The voting itself however did surprise as the previous 8-1 vote flipped to a unanimous 9-0 decision with long-time hawk Ian McCafferty resigning his Hawkish vote citing weak wage-growth and low inflation.

The accompanying statement provided a familiar assessment of the economic picture citing continued risks from the slowdown in emerging markets and global headwinds which gave the Bank cause to lower the domestic growth forecast for 2016 to 2.2% from 2.5% in November whilst stating that risks to growth lie on the downside.

Despite a lowered growth outlook the Bank did say that they see a slight pickup in global economic growth though they also foresee a further slowdown in China over the next three years.Inflation, as expected, is forecast to remain low over the near term, averaging just 0.8% in 2016, though the BOE do forecast inflation to rise over the 2% target by 2018 expecting that inflationary pressures will subside as global head winds dissipate.

With the BOJ and ECB having both recently cut rates further, investor expectations have been building for a potential UK rate cut on the horizon.When questioned about the prospect of this move however, BOE governor Mark Carney dismissed the idea stating that the the next move on UK rates will “more likely than not” be to the upside. Investors meanwhile remain unconvinced with market pricing showing the probability of a cut this year now outweighs that of a hike and just a quarter point increase not forecast until 2018.

Reaction to the event was GBP negative and although movement against USD was muted in the wake of recent dovish comments by the Fed, GBP fell sharply against the other majors.

Data & Developments Since

The period since the Last BOE meeting has marked a particularly volatile period for sterling which has been heavily weighed upon by a number of factors. The investor uncertainty surrounding a possible “Brexit” has been a prominent theme as we draw closer to the UK public referendum on June 23rd. The announcement on behalf of the London Mayor last month that the was supporting the campaign for Britain to leave the EU fueled a sharp sell-off as uncertainty deepened. A steady stream of Bank forecasts painting varying depths of UK economic doom in the event of an exit kept price under pressure until a rally in risk saw Sterling correct higher.

Data since the last meeting has done little to inspire optimism ahead of this meeting.

• UK Manufacturing and Services PMIs both hit their lowest levels since 2013
• January Inflation missed on Core, which is the reading the BOE pay most attention to,
• January Average weekly earnings in the 3-months to Dec YoY falling to 1.9%, down from the recent 3% highs last year but rebounded to 2.1% in the 3 months to January, beating expectations of 2%
• Unemployment which had been improving steadily also showed a deterioration, ticking up to 5.1% from 5% previous, where it remained in January

The economic environment in the UK is showing clear signs of deterioration and in the wake of yet another round of huge stimulus from the ECB, in a bid to tackle deflation, it seems that market expectations are moving towards the next action by the BOE being one of easing rather than tightening.

Expectations For This Meeting

The economic environment in the UK is showing clear signs of deterioration and in the wake of yet another round of huge stimulus from the ECB, it seems that market expectations are moving towards the next action by the BOE being one of easing rather than tightening.

That said, markets are expecting no change to the status quo at this meeting with rates expected to remain on hold with a decisive 9-0 vote. The most vocal Dove among the MPC members, Gertjan Vlieghe, recently commented that he may be pushed into voting for a cut if economic data continues to disappoint but given the recent tick up in wage-growth, It doesn’t appear to be a strong risk for this meeting. Aside from the accompanying statement there will be little in the way of new information at this meeting because it isn’t a quarterly event and so will include no updating of the bank’s inflation and growth forecasts. As such, a dovish tone to tomorrow’s event is expected but the March BOE meeting isn’t likely to prove a huge catalyst for Sterling which is currently held hostage by Brexit concerns and the Oil/risk outlook.

Trade ideas to come, after the FOMC…