BOE's 'Super Thursday' Might Not be All that Super for GBP
- BOE voted unanimous at last meeting for first time since July 2015.
- Current inflation outlook calls for return to target in early-2018.
- Higher volatility in FX markets should have implications for your trading strategies.
The Bank of England is meeting today around the greatly anticipated 'Super Thursday,' one of the four days per year that the BOE releases it rate decision, meeting minutes, and Quarterly Inflation Report (QIR) all in one fell swoop. Unfortunately for traders, even as 2016 was supposed to bring the BOE closer to normalizing policy, with the UK’s EU referendum set for June 23, in context of UK data starting to slip, it is all but certain that the BOE will sit pat today.
Indeed, with the BOE having voted unanimously 9-0 at their last policy meeting – the first unanimous vote since July 2015 – the hawks have fallen back in line with the doves in their deference to keep rates lower for longer. The rationale is nuanced, but can be boiled down into two basic ideas. First, the June 23 referendum, despite the better chance that the UK votes to stay in the EU, represents a potential game changing liquidity event on the horizon; understandably so, the BOE doesn’t want to rock the boat as this ship comes into port.
In turn, thanks to the ‘Brexit’ overhang, policymakers have been allowed to refocus their attention to domestic conditions in the UK. In the February QIR, BOE policymakers had revised lower their expectations for growth and inflation over the next several years, saying that UK growth would be +2.2% this year (from +2.5% in the November 2015 report) and +2.3% in 2017 (from +2.6%). In the interim period between the February QIR and now, secondary and tertiary economic data has been less than favorable; it seems that the specter of a Brexit has weighed on confidence in the economy.
Considering that policymakers were divided earlier in the year, the recalibration into a unanimous view of “keep calm and carry on” suggests that the earlier hawkishness was overblown; and that the Brexit threat has had a material impact on growth. Concurrently, with UK inflation still well-below their medium-term target (last reading was +0.5% y/y), it’s difficult to envision a scenario today where the BOE strikes anything more than a conciliatory, cautious tone. Cuts to headline growth and inflation forecasts are possible. The line in the sand is early-2018 for inflation; as this is when the BOE has previously stated they believe inflation will cease to remain below the headline target, this represents the anchor point for setting expectations around.
In light of the fact that GBP/USD’s short-term volatility term structure (comparing 1W through 6M implied vols) shows heightened expectations for a spike in volatility in mid-June (right around the referendum, of course) then a return to levels closer in line with historical averages, it seems the market is pricing Brexit to be a one-off type of event. That is, the heightened volatility for the British Pound – which has hurt the currency – is expected to dissipate shortly. Given the inverse relationship between implied volatility and spot rates, a forthcoming expected decline in volatility means that any weakness around today’s ‘Super Thursday,’ should it materialize, would be an opportunity to buy the dip in the GBP.
If that’s the case, now that the BOE is adopting a more Fed- or ECB-like monetary meeting schedule, it too has fallen into the trap of becoming predictable whilst attempting to become transparent. The next time the BOE updates its growth and inflation forecasts is August, post-referendum. Seeing as the BOE might not have enough data in hand to determine the lasting impact of the Spring’s Brexit-borne maladies, it seems that traders may start to want to plan for the November 2016 ‘Super Thursday’ at the earliest for signs that the BOE will normalize policy.
If you haven't yet, read the Q2'16 Euro Forecast, "EUR/USD Stuck in No-Man’s Land Headed into Q2’16; Don’t Discount ’Brexit’," as well as the rest of all of DailyFX's Q2'16 quarterly forecasts.
--- Written by Christopher Vecchio, Currency Strategist
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