Will hawkish Bank of England expectations be dashed?
Mixed signals from the Fed this week have certainly put central banks in the spotlight, with communication and a unified message seemingly tough to advance. The initial shock of the hawkish dot plot with the dollar surging higher was initially tempered this week by Chair Powell himself reiterating that the Fed were in no mood to raise rates any time soon and rising price pressures were still temporary. Overnight comments by Fed officials have been on the more hawkish side but market moves are now more contained – we are at least “talking about talking about talking about tapering”!
It’s now the turn of the Bank of England to update their views to the market at its meeting today at midday UK time. This is an interim meeting and consensus sees no major policy changes after the MPC decided to keep their asset purchases target unchanged at its previous rendez-vous in May, while slowing the weekly buying dynamic. Essentially this bought time to fend off rate hike pressures with bond buying now ending towards the end of the year.
With no updated forecasts today until the next meeting in August, the bank is expected wait for the new monetary policy report and not shift current market expectations. Rate markets see the first hike to roughly 0.25% by the middle of next year, which has moved more aggressively since its May meeting. The bank’s projections are already at the optimistic end of the range and with inflation expected to breach the 2% target for the first time in two years, hawks will want to see some acknowledgment of this development.
But this will probably be balanced by caution around the recovery outlook owing to the delayed complete reopening of the economy, now set for mid-July. The bank may wish to take a little longer to see the full effects of this pause with some uncertainty still remaining about the Delta (plus) variant too. So, perhaps there is room for some mild disappointment in sterling if the bank does buy some more time.
Cable off the lows and sitting on support
GBP/USD is up 1.25% this week although it remains 1.65% lower on the month. The pair is currently trading around the midpoint of yesterday’s range and on its fourth straight day of gains.
After last week’s selloff broke through the 100-day SMA and the long-term upward trendline, the pair’s daily RSI touched a rarely seen 30 level. A sharp bounce has inevitably followed and a push north above the psychological 1.40 level should further encourage bulls to look towards last week’s high at 1.4133, especially if the Bank of England does portray a more optimistic outlook.
A strong weekly close would look like a false break of the long-term trendline. On the flip side, if hawkish expectations are dashed and the MPC is more cautious before potentially more tapering, support rests at the weekly lows around 1.3786/91.
