The BOE has been dealt a complicated hand and in monitoring the situation traders have a three-legged stool to consider consisting of; 1) the Pound post-Brexit, 2) BoE policy dynamics post-Brexit , and 3) core economic fundamentals.
Adding to the intrigue in recent months has been the comments of Governor Carney and others on the committee, as well as some surprising vote totals when it concerned the prospect of raising rates at previous meetings. Last June there were three central bank members that voted for an immediate increase in rates, which was followed on by surprisingly hawkish comments from Governor Carney and Chief Economist Andrew Haldane.
Exiting the last meeting, signals were starting to point towards a strong possibility for a rate increase at this meeting. However, it is a very fluid macro environment, and much has changed including the broadly held opinion of markets that rates will be held steady for at least one more meeting cycle.
Below is a look at all three considerations and preview key considerations for Super Thursday.
- The Pound:
The Pound has recovered nicely from the depths it reached in the immediate aftermath of the Brexit referendum. The upward ascension has a few structural forces including; a bounce off the double bottom around 128.00 indicating support at that level, the fall in the Dollar during the same time, and a choppy but generally improving outlook for the economy in Great Britain at large.
- BoE Policy Dynamics:
At the last meeting, BoE watchers were surprised that the vote was 5-3 for holding rates steady, meaning there were three Monetary Policy Committee (MPC) members voting for an immediate increase. This seemed far more hawkish than the market was fully prepared for. However, since the last meeting there has been a change in the composition of the MPC, and one of the members who voted for an increase last time is no longer on the committee. The vote could be 6-2 this time, and the change might solely be attributable to a new composition of the committee. Further, the comments from Haldane and Carney indicating some measure of hawkishness following the last meeting would make a dovish pivot more difficult.
- Core Economic Fundamentals:
Since the last meeting, we have seen inflation ebb somewhat from 2.9% in May, to 2.6% in June. Whether this represents a one-time softening of inflation, or it represents a more deliberate move with the inflation wave breaking and falling back closer to the BoE target of 2.0% is unknown. What is known is we will have a new number for July being released as part of the events on Thursday. That number will be critical to confirming if we are in a range in well above BoE targets (if it is 2.6% or above), or if we have further to fall (anything below 2.6%).
With the potential for a new vote total in support of a rate hike, as well as the near-term volatility we have seen over the last 60 days in the inflation number, this meeting could produce a confusing mixed bag. The Pound has enjoyed moderate upward pressure of late, with the consistent and plodding effect of a multi-month meaningful uptick. It seems this move has the determination to slice through present term fog. While we might not see a similar level of outward hawkishness when exiting this meeting compared to what we saw last time, the current trajectory might be strong enough to withstand anything short of outward dovishness on the part of the BoE.
To be clear, if there is a surprise and there is a new dovish tilt in comments or policy, this would be in stark contrast to the comments from the previous meeting and would represent a 180 degree turn for the BoE. We see no basis for that type of about face.
Our view is for the BoE to attempt to stake out a hazy middle ground and cautiously hedge both sides of a bet many are not even fully convinced they completely understand yet. If the BoE follows this path, this could potentially neither strengthen nor dissuade the current glide path being enjoyed by the Pound. While the situation out of Great Britain has resembled a roller coaster and no one would say the ride is over yet, it has been some time since we have been through a loop and it is hard to see one in the near term.
With no meaningful tilt or redirect in either direction of the monetary policy spectrum by the BoE, we would expect the Pound to continue to gradually drift higher, especially in relation to the US dollar. The next important level for short term binary traders is 133.00 which could be within striking distance for the end of the week.