GBP

Will above target inflation prompt the BoE to act?

With the united kingdom economy recovery learning and inflation overshooting at 2.1% could the BoE look towards tightening monetary policy? Whilst no about-face is predicted on Thursday more more hawkish tilt could boost GBP.
The BoE comes under the spotlight amid the continued excitement following the Fed’s hawkish shift and alter to it’s dot plot.

The BoE isn’t expected to regulate its policy, keeping interest rates at the record low level of 0.1%. However, policy makers look to remain divided over the £875 billion bond buying programme as data improves and inflation tops the BoE’s 2% target level.

What the info says

Since the last BoE monetary policy meeting, the united kingdom continued to ease covid pandemic restrictions, reopening indoor hospitality on 17th May. Economic data has been encouraging with May’s Composite PMI at a record high.

The labour market has fared better than expected thus far , with unemployment dropping to 4.8% and almost 200,000 jobs created in May as businesses took on staff before the reopening.

Inflation jumped to 2.1%, above the BoE’s 2% target. Unlike the Fed the BoE has not said that it’s willing accept an overshoot in inflation, potentially paving the way for a sooner move by the united kingdom financial institution . Although, just like the Fed, the BoE also considers higher inflation to be transitory.

The BoE has already upped in growth forecast for this year to 7.6% in an optimistic move. But it’s never all rosy; retail sales unexpectedly declined and therefore the government has delayed the ultimate lifting of lockdown restrictions thanks to a pointy rise in delta variant covid cases. The latter is unlikely to possess an outsized economic impact because it stands but adds a component of uncertainty into the central bank’s equation.

Even so stronger growth, more jobs and better inflation should tilt the BoE during a slightly more hawkish direction.

More hawks amoung the doves?

BoE Chief Economist Andy Haldane voted to finish the QE programme in August at £825 billion. He was alone. The markers are going to be watch carefully to ascertain if the other policy makers join him.

Interest rate futures prices point to the BoE hiking rates in 2022 to 0.25%. this is often a big turnaround from the beginning of the year when negative interest rates were an opportunity . Gertjan Vlieghe typically a known dove said that he believed that rates would wish to rise in late 2022. Most economists still see 2023 because the date to start out rising rates.

Should the BoE adopt a more hawkish stance and indicate a sooner advance rates or should more policy makers join Haldane calling for an end to QE then the Pound could strengthen boosting GBP/USD towards 1.40 and pressuring EUR/GBP.

A guide to BoE

Where next for EUR/GBP?

The GBP/EUR has been grinding lower since late April. The pair trades below its 6 week descending trendline and below its downward sloping 50 & 100 day ma.

The RSI is in bearish territory suggesting more losses might be on the cards. A more hawkish BoE could see EUR/GBP break below 0.8545 A level which has have attracted dip buying in recent sessions. an opportunity below this level could see sellers attach 0.85 round number and 0.8475 the April low.

Should the BoE persist with the established order , or maybe disappoint the market, EURGBP could push higher. Any recovery would wish to interrupt through 0.8615/30 resistance area which sees the confluence of the 50 & 100 sma and therefore the descending trendline. it might take a move above 0.8650 to negate the near term downtrend.