Super Thursday: Brexit Possibility to Complicate Inflation Projections
Fundamental Forecast for GBP: Neutral
- GBP/USD Higher on Soft Markit/CIPS Services PMI, ‘Brexit’ in Focus
- GBP/USD Trades Mid-Channel
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It was just seven months ago that we were going into the Bank of England’s Super Thursday announcements with the potential of hearing about a rate hike in the not-too-distant future. Super Thursday is the once-a-quarter event that sees a batch of data released out of the Bank of England, as we get the bank’s rate decision from the Monetary Policy Committee (MPC), the meeting’s minutes, as well as the Bank’s Quarterly Inflation Report.
Of course, we didn’t hear about that rate hike in November, and in the seven months since, little evidence has given the appearance that anything along those lines may be in the cards anytime soon (like, within the next year, at least). This hasn’t been a completely dovish stance out of the Bank of England though, as last quarter’s Super Thursday saw BoE Governor Mark Carney talk down the possibility of further rate cuts. And a little later in February, we saw another risk factor pop up in the possibility of a Brexit scenario as the UK nears a referendum to decide on the fate of the country’s continued European Union membership.
The combination of related macro-economic risk factors continuing to revolve around the UK economy (and the world, at large), coupled with the utter unknowns of the probabilities or even repercussions of a Brexit scenario make fundamental projections in the British Pound even more opaque than normal. There isn’t a clear driver on either side of the currency at the moment, as the BOE has retained a rather muted stance over the last nine months while growth has been subdued and inflation lackluster. All of that can change significantly if British voters decide in favor of a Brexit on June 23rd, and this should make next week’s Quarterly Inflation Report especially interesting as the bank is faced with a dizzying array of variables with which to forecast the near-term direction of the UK economy.
More likely, we’ll see the Bank of England tread cautiously through this Super Thursday without making too many adjustments to policy or forecasts. We’ve already heard the bank allude to the fact that they’ll ‘react more cautiously to data news over this period than would normally be the case,’ at their April meeting; and as traders we should too with the full expectation that enhanced volatility may be on the horizon as British voters near the polls on June 23rd.
The big question for the rate decision is whether or not we see a break from the bank’s unanimity in April when the MPC voted 9-0 in favor of holding rates at .5%. Should we see a dissenting vote in favor of cutting rates, we could see some Sterling weakness, although even that may be mitigated given how quickly matters may change in the next six weeks.
Due to this opaque environment as we approach Super Thursday and perhaps more importantly the Brexit referendum, the forecast for the British Pound will remain at neutral.