British Pound May Fall on Cautious Bank of England Stance
- All eyes on Bank of England as “Super Thursday” looms ahead
- Carney and company likely to maintain a broadly dovish posture
- Creeping BOE rate hike bets make British Pound vulnerable
All eyes are on the Bank of England ahead of the quarterly flood of economic policy is “Super Thursday”. An updated Inflation Report laying out where officials intend to steer in the coming months is due to be released and Governor Mark Carney will hold a presser to discuss its contents. The central bank will also release the outcome of and minutes from the latest meeting of the rate-setting MPC committee.
Needless to say, all this commotion is likely to translate into British Pound volatility. Policymakers have struck a cautious tone despite the UK economy’s resilience since last year’s EU membership referendum. A chorus of forecasters expected the worst following the triumph of the Leave campaign but this has plainly not materialized, at least for now.
The central bank’s concerns are not without merit however. A lag between the referendum and its impact on economic activity was always likely. After all, it takes time for contract-bound businesses to adjust staffing and inventory levels, no matter how perturbed they are by Brexit uncertainty. Furthermore, negotiations on the terms of the EU/UK divorce have yet to begin in earnest.
With this in mind, Mr Carney and company will probably continue to push the idea that recovering inflation has more to do with higher crude oil prices and a weaker Sterling – both transitory factors – than a true return of pricing power. They may also underscore the multitude of risks besides Brexit threatening the economic outlook, from key upcoming elections on the Continent to an uncertain US fiscal stance.
On balance, this ought to give the Bank plenty of cover to maintain a broadly dovish posture (albeit with a pledge to be vigilant should price growth get too hot). Priced-in BOE interest rate hike bets have crept higher since the beginning of the year, with markets warming to the idea of modest tightening over the coming 12 months. The Pound may face selling pressure if such hopes are disappointed.
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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