As we know, the tide turns quickly in forex markets and from the peak of bullish market sentiment only two months ago, GBP has since been laid aside and investors have scaled back their expectations over the proximity of a UK rate increase.
As with the US, a mix of disappointing and unconvincing data sets amid a backdrop of downward inflationary pressure and global growth concerns has seen a lack of Hawkish momentum in recent BoE meetings and market sentiment has adjusted accordingly with GBP/USD shedding nearly 1000 pips from its 2015 high in June.
With the FOMC September decision still shrouded in uncertainty and the ECB having recently announced their plan to step up stimulus to aid the flagging economy, investors have turned increasingly dovish on the Bank Of England and today’s meeting is not expected to produce any encouragement for bulls.
Recent Comments
In comments made at the recent Jackson Hole symposium in the US, BoE Governor Mark Carney said that whilst the Chinese slowdown could weigh on inflation, it didn’t affect the BoE’s position on the timing of an interest rate rise and reiterated that the British economic recovery “will likely put the decision as to when to start the process of gradual monetary policy normalisation into sharper relief around the turn of this year.”
For the most part Britain’s economy is well insulated from the China slowdown with investment in China accounting for just 0.5% of total foreign investment in the UK and exports to China just 0.8% of GDP in 2014.
Inflation
The Bank Of England has confirmed it’s willingness to look through temporary periods of disinflation expecting a rebound into the year end. However, with oil and commodity prices continuing to fall investors may be concerned about the accuracy of this assessment. The latest CPI figures, however, should provide some support as data shows core CPI increased 1.2% YoY vs 0.8% expected, actually showing some positive momentum in inflation prices.
Market Expectations
The majority of players are expecting a UK rate rise in Q2 of 2016 with oil prices still posing a significant risk to the BoE’s inflation target. With the BoE having made no specific commitment to the timing of a rate hike and investors still dovish against recent data weakness it would appear that risks are skewed slightly more to the upside with any data improvements and a rebound in energy prices likely to increase GBP bullishness.
Not expecting anything major out of today’s BoE meeting, we think that the split will remain the same as last time — 8–1 — with rates unchanged, but that perhaps there is room for upside on any perceived hawkishness.
The best expression of GBP bullishness on the back of today’s meeting is likely to be found in the crosses where GBP continues to enjoy upside in trends formed on policy divergence with the Central Banks of Canada, Australia and New Zealand all firmly in easing cycles.
Currently chewing through a heavy order block, GBP/AUD is respecting the bullish trend-lines in play. A move lower into the deeper trend line against those previous broken highs should offer good support for longs. Similarly, if price remains supported here, a move back above the near term resistance should encourage momentum for a run back up to the 2015 high.