BoE Finally Upgrades its View

24 hours after sterling plunged on unexpectedly weaker inflation figures, the currency rallies back above $1.60 on the Bank of England’s upgrade of growth, employment—despite a downgrade of its inflation view.

The BoE upgrade of its GDP view was no surprise after the array of strong over the last 3 months as well as the upward revisions from private sector economists and the IMF.

Lowering the inflation forecast closer to the 2.0% level was also no surprise after Tuesday’s release of the 2.2% figure in October CPI.

Bringing forward its forecast for 7% unemployment to Q3 2015 from Q4 2016 may also have been of no great surprise but bears significant implications. 7% is the threshold for which the BoE said would begin positioning for higher interest rates. The central bank indicated that 7% was not a firm boundary below which it would necessarily be forced to raise rates (especially if inflation remained around its preferred 2.0% level).

Nonetheless, the opposite argument could also be made that if employment growth remains on the rise and monthly unemployment figures continued to fall below their 3-month moving average (as they have over the past 12 months) and unemployment drops below 1.2 million, then tapering the £375 bln in monthly purchases would become an item for next year.

While the low inflation figures cement the case for the BoE to remain on hold until 2015, this path will not be devoid of returning speculation of further dovishness if the BoE were to lower its 7% unemployment threshold to say, 6.5%-6.7%. The fact the BoE has upgraded its GDP view and downgraded its inflation view produces the notion of higher growth and low inflation, which should not necessarily be negative for the currency as in the case of lower growth and lower inflation would imply. The low inflation figures may imply less pressure on the BoE to tighten sooner than later, but the upgrade in growth forecasts paves the way for faster decline in the unemployment rate towards the 7.0% threshold.

We see the possibility for a short-term decline near in GBPUSD 1.5800-1.5770s before a gradual recovery back to 1.6100 and 1.6300.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.