Cable is recovering from its 1.3240 US session low, so far reaching a high of 1.3297 in Asia as some US$ selling takes hold, although further upside appears to lack follow-through ahead of the key risk events for today – the BOE rate decision, the quarterly Inflation Report (QIR) and to a lesser extent, the UK Construction PMI. Mark Carney will speak shortly after the BOE announcement.
Further consolidation in the 1.3240/1.3300 range seems likely ahead of the BOE announcement, with the dollar generally seen to be on the defensive due to the stalling US Treasury yields, where the 10 year is again stuck 2.4%.
As far as the BOE are concerned, there appear to be 3 main scenarios.
- A 25 bp hike, but with a cautious outlook
The mostly common thought is that of a 25bp hike with a dovish Inflation Report, which is pretty much currently priced in.
The BOE could well add that any future follow-up tightening will be data dependent, and given that the economy is expected to slow in 2018, ahead of Brexit, any further opportunity to hike may well be limited.
Assuming that future data continues to remain upbeat, the market will then continue to price gradually tighter policy in the months ahead.
A dovish hike (interpreted by traders as ‘one-and-done’) should be fairly neutral for sterling although we may see a bit of a dip in Sterling, but with some follow up buying if traders decide a 2018 hike may still be on the cards.
The BOE will now want a Sterling collapse on its hands and will therefore be very cautious in its wording.
- No rate hike
After the way a hike has been telegraphed through the press and through the markets, this seems unlikely and would be disruptive, merely rolling out expectations of a hike to a future meeting, with February then seeming likely to become the next most likely candidate for a rate rise.
There is a chance that the BOE could wish to wait until February as the Q4 inflation figure will have been released by then although this would seem overly cautious.
It would also act as quite a negative factor on Sterling against both the Euro and the US$.
- Rate hike of 25bp with a more hawkish Inflation Report
Depending on the vote count, this could see a mildly to an extremely positive outcome for Sterling.
A decisive vote and a statement suggesting that the BOE will need to tighten policy to a more neutral rate would run counter to the previously stated view that hikes will be ‘gradual’ and is therefore not really the expected outcome.
Such an outcome might be seen as damaging for the economic outlook, particularly with Brexit lurking in the background.
If we do see a decisively hawkish vote, then expect Cable to head towards 1.35
A neutral stance is required going into the BOE meeting although I do slightly favour the upside and suspect that we could see a test of 1.34, where decent Fibo resistance lies (1.3405; 61.8% of 1.3656/1.3026), as I think the BOE may be mildly upbeat in their longer-term outlook, despite the Brexit stories.
Possibly more interesting, check out the weekly Eurgbp chart below, which appearss to be breking major support, suggesting frurther Sterling strength ahead.
GbpUsd 4 hour