Will above target inflation prompt the BoE to act
When: Thursday 24th June
The BoE comes under the spotlight amid the ongoing excitement following the Fed’s hawkish shift and change to it’s dot plot.
The BoE is not expected to adjust its policy, keeping interest rates at the record low level of 0.1%. However, policy makers look to stay divided over the £875 billion bond buying programme as data improves and inflation tops the BoE’s 2% target level.
What the data says
Since the last BoE monetary policy meeting, the UK continued to ease covid pandemic restrictions, reopening indoor hospitality on 17th May. Economic data has been encouraging with May’s Composite PMI at a record high.
The labour market has fared better than expected so far, with unemployment dropping to 4.8% and almost 200,000 jobs created in May as businesses took on staff ahead of the reopening.
Inflation jumped to 2.1%, above the BoE’s 2% target. Unlike the Fed the BoE has not said that it is willing accept an overshoot in inflation, potentially paving the way for a sooner move by the UK central bank. Although, like the Fed, the BoE also considers higher inflation to be transitory.
The BoE has already upped in growth forecast for this year to 7.6% in an optimistic move. But it’s certainly not all rosy; retail sales unexpectedly declined and the government has delayed the final lifting of lockdown restrictions due to a sharp rise in delta variant covid cases. The latter is unlikely to have a large economic impact as it stands but adds an element of uncertainty into the central bank’s equation.
Even so stronger growth, more jobs and higher inflation should tilt the BoE in a slightly more hawkish direction.
More hawks amoung the doves?
BoE Chief Economist Andy Haldane voted to end the QE programme in August at £825 billion. He was alone. The markers will be watch carefully to see if any other policy makers join him.
Interest rate futures prices point to the BoE hiking rates in 2022 to 0.25%. This is a significant turnaround from the start of the year when negative interest rates were a possibility. Gertjan Vlieghe typically a known dove said that he believed that rates would need to rise in late 2022. Most economists still see 2023 as the date to start rising rates.
Should the BoE adopt a more hawkish stance and indicate a sooner move on rates or should more policy makers join Haldane calling for an end to QE then the Pound could strengthen boosting GBP/USD towards 1.40 and pressuring EUR/GBP.
Where next for EUR/GBP?
The GBP/EUR has been grinding lower since late April. The pair trades below its 6 week descending trendline and below its downward sloping 50 & 100 day ma.
The RSI is in bearish territory suggesting more losses could be on the cards. A more hawkish BoE could see EUR/GBP break below 0.8545 a level which has have attracted dip buying in recent sessions. A break below this level could see sellers attach 0.85 round number and 0.8475 the April low.
Should the BoE stick with the status quo, or even disappoint the market, EURGBP could push higher. Any recovery would need to break through 0.8615/30 resistance area which sees the confluence of the 50 & 100 sma and the descending trendline. It would take a move above 0.8650 to negate the near term downtrend.
How to trade with City Index
Follow these easy steps to start trading with City Index today:
- Open a City Index account, or log-in if you’re already a customer.
- Search for the market you want to trade in our award-winning platform.
- Choose your position and size, and your stop and limit levels.
- Place the trade.
This report is intended for general circulation only. It should not be construed as a recommendation, or an offer (or solicitation of an offer) to buy or sell any financial products. The information provided does not take into account your specific investment objectives, financial situation or particular needs. Before you act on any recommendation that may be contained in this report, independent advice ought to be sought from a financial adviser regarding the suitability of the investment product, taking into account your specific investment objectives, financial situation or particular needs.
StoneX Financial Pte. Ltd., may distribute reports produced by its respective foreign entities or affiliates within the StoneX group of companies or third parties pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed to a person in Singapore who is not an accredited investor, expert investor or an institutional investor (as defined in the Securities Futures Act), StoneX Financial Pte. Ltd. accepts legal responsibility to such persons for the contents of the report only to the extent required by law. Singapore recipients should contact StoneX Financial Pte. Ltd. at 6826 9988 for matters arising from, or in connection with the report.
In the case of all other recipients of this report, to the extent permitted by applicable laws and regulations neither StoneX Financial Pte. Ltd. nor its associated companies will be responsible or liable for any loss or damage incurred arising out of, or in connection with, any use of the information contained in this report and all such liability is hereby expressly disclaimed. No representation or warranty is made, express or implied, that the content of this report is complete or accurate.
StoneX Financial Pte. Ltd. is not under any obligation to update this report.
Trading CFDs and FX on margin carries a high level of risk that may not be suitable for some investors. Consider your investment objectives, level of experience, financial resources, risk appetite and other relevant circumstances carefully. The possibility exists that you could lose some or all of your investments, including your initial deposits. If in doubt, please seek independent expert advice. Visit www.cityindex.com/en-sg/terms-and-policies for the complete Risk Disclosure Statement.
ALL TRADING INVOLVES RISKS. LOSSES CAN EXCEED DEPOSITS.
City Index is a trading name of StoneX Financial Pte. Ltd. (“SFP”) for the offering of dealing services in Contracts for Differences (“CFD”). SFP holds a Capital Markets Services Licence issued by the Monetary Authority of Singapore for Dealing in Exchange-Traded Derivatives Contracts, Over-the-Counter Derivatives Contracts, and Spot Foreign Exchange Contracts for the Purposes of Leveraged Foreign Exchange Trading. SFP is also both Derivatives Trading and Clearing member of the Singapore Exchange (“SGX”). SFP is a wholly-owned subsidiary of StoneX Group Inc.
The information provided herein is intended for general circulation. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. You should take into account your specific investment objectives, financial situation or particular needs before making a commitment to invest, including seeking advice from an independent financial adviser regarding the suitability of the investment, under a separate engagement, as you deem fit. No representation or warranty is given as to the accuracy or completeness of this information. Consequently, any person acting on it does so entirely at their own risk.
The information does not represent an offer of, or solicitation for, a transaction in any investment product. Any views and opinions expressed may be changed without an update. To understand the risks and costs involved, please visit the section captioned “Important Information” and the “Risk Disclosure Statement”.
The information herein is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation.
StoneX Financial Pte. Ltd. 1 Raffles Place, #18-61, One Raffles Place Tower 2, Singapore 048616. Tel: 6309 1000. Co. Reg. No.: 201130598R.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
© City Index 2024