BoE rate hike talk to boost the pound

As central bank bonanza week continues and once the Fed rate announcement is in the rear-view mirror, attention will shift towards the BoE’s rate decision tomorrow.
The BoE are not expected to hike rates on Thursday; however, they might talk up the probability of a rate hike later this year. Even as central banks around the globe, such as the ECB, the RBA and now potentially the Fed are adopting a more dovish stance towards monetary policy, the BoE could show themselves to be the odd ball with a shift towards a less dovish stance. 

A hike seems rather off course, at least that’s what the pound traders think. Domestic political uncertainty, the rising probability of a general election before the end of the year and of course Brexit gives them good reason to be cautious. Yet recent BoE policy makers have signalled that the markets are underestimating the probability of further tightening.

What does the data say?
Inflation is on target at 2%. Wage growth continues to perform well, +3.4% yoy in April. Consumer spending is still low, however spending has increased more quickly recently, owing to the higher wages in real terms. The central bank expects rising wages to boost spending and inflation going forwards.
On the other side of the equation, now that stockpiling has ground to a halt, growth in the second quarter is looking stagnant. Manufacturing is in contraction; business investment continues to be limited and the rise in consumer spending is not sufficient to offset these negatives. Finally add into the mix the increased likelihood of a no deal Brexit should Boris Johnson take the helm as PM and the outlook is certainty gloomy.

What to watch for:
Given that market expectations of a rate hike have completely flattened off, there is a good chance that the BoE will continue hinting towards rate hike later this year. Michael Saunders could even vote in favour of an immediate rate hike. The question is whether pound traders will buy into this talk? The reality is the timing of a hike this year looks close to impossible and a general election more likely.

Pound opportunities:
A less dovish sounding BoE could give the pound a boost in the short term particularly versus those currencies whose central bank has recently adopted a more dovish stance. In this scenario a short EUR/GBP could be an interesting play.  However, strength in the pound could be short lived as Brexit and the Tory leadership battle quickly return to the forefront of traders’ minds. Blink and you’ll miss it.

EUR/GBP has broken through its 50 sma and is heading towards it 100 sma. A break through resistance at 0.8870 could open the door to 0.8850 before 0.8825. On the upside 0.8933 should be cleared prior to 0.8970.