Bank of England Preview: How Will the Pound (GBP) React?

[MongiIG]

 

GBP/USD, BoE Price Analysis & News

• BoE Expected to Raise Bank Rate By 25bps
• Dovish Hike Remains a Downside Risk for GBP

SUMMARY: The Bank of England is widely expected to deliver another 25bps rate hike at its upcoming meeting. In light of recent voting splits within the MPC, it is anyone’s guess who will vote for a larger hike or not, possibly another 6-3 or 5-4 split. That being said, while central banks have opted for larger hikes, namely the Fed with a 75bps rate rise, I still see a 25bps hike from the BoE as the most likely scenario given their heightened concerns over growth.

PREVIOUS MEETING: A reminder that at the prior meeting the BoE raised rates by 25bps, although did surprise with a 6-3 vote split, in which the minority voted for a 50bps rate rise. However, the main focus had been on the shocking growth outlook where the central bank downgraded GDP for the end of the year by 1ppt, while also seeing GDP contracting 0.25% next year. Keep in mind that this took into account the market implied interest rate at the time, which has since increased by over 100bps and thus would suggest growth is likely to fall further.

DATA: Inflation has continued to edge higher, the latest reading printing at 9.0% Y/Y (vs Exp. 9.1%). Although, consumer confidence has fallen to record lows, PMIs, particularly in the services sector cratered from 58.9 to 53.4 and GDP for May showed a surprise contraction, raising the likelihood of negative GDP for Q2. Therefore, further compounding the concerns that the Bank of England have over the growth outlook, meaning that the central bank will remain a reluctant hiker.

Risk of Another Dovish Hike

To me, the risk of a dovish hike remains given that money markets are pricing in 38bps of tightening and thus a 25bps move would likely weigh on the Pound amid a disappointment on calls for a larger hike. At the same time, even if the BoE opted for a 50bps hike, I would expect a spike higher in the Pound to be faded, as we had seen with the RBA and BoC.

Money Markets at Risk of Dovish Repricing

Source: Refinitiv

 

Jun 16, 2022 | DailyFX
Justin McQueen, Strategist