BoE preview: will the central bank make another step towards a rate hike?
The desk anticipates that the Bank of England (BoE) will maintain the Bank Rate at 3.75% during today's meeting, with a possibility of one or two hawkish dissenters. Per the full note source, while recent economic data has not urgently called for rate hikes, the persistent inflationary pressures, particularly in services, suggest that the BoE may signal a future rate increase, potentially as early as June. The market currently prices in a 63% probability of a June hike, indicating room for GBP appreciation should the BoE adopt a hawkish tone. This outlook contrasts with the FTSE 100, which may face downward pressure in such a scenario.
What the desk is arguing
The desk believes that the BoE's decision to hold rates steady today does not preclude a hawkish shift in tone, particularly given the recent inflation data. Per the full note source, while the latest UK CPI showed a modest rise in headline inflation to 3.3%, core CPI declined slightly, indicating a mixed inflationary landscape. However, the persistent rise in Services CPI to 4.5% underscores the risk of entrenched inflation, which could compel the BoE to tighten policy sooner than expected.
Moreover, the S&P Global PMIs indicate a concerning trend, with businesses reporting the steepest rise in cost burdens in over three years, driven by energy price shocks and wage pressures. This suggests that inflationary pressures are not merely transitory, reinforcing the desk's view that the BoE may need to act decisively to maintain its inflation targets.
Where it sits in our coverage
Our consensus target for GBP/USD is 1.075, with a range from 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - goldmansachs: 1.12 (Mar26)
This perspective aligns with jpmorgan's view but diverges from bofa, which holds a more cautious stance. The desk's outlook is positioned at the upper end of the consensus range, reflecting a more optimistic view on GBP appreciation.
How other firms see it
Firms like jpmorgan and goldmansachs share a similar bullish outlook on GBP, anticipating potential rate hikes that could strengthen the currency. Conversely, bofa remains skeptical, suggesting a more dovish approach from the BoE in the near term.
Traders should also monitor the EUR/GBP exchange rate, as shifts in BoE policy could create ripple effects across the currency pair. Additionally, the trajectory of UK inflation data will be critical in shaping market expectations for future BoE actions.
What the calendar says
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The Bank of England is expected to keep the Bank Rate unchanged at 3.75% today with one or two hawkish dissenters. At the last meeting, the BoE delivered a hawkish hold with unanimous decision to leave rates unchanged and the removal of the easing bias. Moreover, in the minutes, policymakers made it clear that they are focused on the risk of second-round effects with several members willing to hike rates if needed.
Going into this meeting, the economic data hasn't been screaming for urgent hikes. The latest UK CPI saw headline inflation rising to 3.3% vs 3.0% in the prior month, but that was very much expected due to the energy shock. Core CPI ticked lower to 3.1% vs 3.2% prior, but Services CPI remained stubbornly elevated at 4.5% compared to 4.3% in the prior month.
The UK unemployment rate fell to 4.9% vs 5.2% in the prior month with some slight easing in wage growth, although the data beat expectations. All in all, it wasn't a bad report but not good either. The problem is that these are lagging data points and the more timely ones like the S&P Global PMIs disclosed a more concerning picture.
The survey showed an acceleration in economic activity in April alongside a record-breaking surge in business costs. The agency noted though that "the improved rate of expansion is in part a reflection of a short-term boost from a rush to secure purchases ahead of feared price rises and supply shortages linked to the war". The bad news is that businesses across both the manufacturing and services sectors reported the steepest rise in average cost burdens in more than three years, with some measures of input price inflation reaching their highest levels since the survey began nearly three decades ago.
The agency noted that "prices are rising not just because of surging energy costs, but also due to increases in charges levied for a wide variety of goods and services, with price hikes often stoked by supply concerns". Businesses cited also strong wage pressures. The surge in costs, driven primarily by energy price shocks and mounting wage pressures, suggests that inflationary pressures could become more entrenched forcing the BoE to retighten policy to avoid erasing the progress achieved since 2022.
Given that they already basically adopted a hawkish bias in the prior meeting and the more timely data is pointing towards heightened inflation risk, the BoE might signal a rate hike for June. The market is pricing in just 63% probability of a rate hike in June, so there's still some room for the GBP to appreciate on the back of a hawkish BoE. That would also weigh on the FTSE 100.
A surprise hike today would trigger a bigger move in the GBP and weigh more heavily on the FTSE 100. I would exclude any type of dovish tone for today's meeting, so in my opinion, the risks are skewed towards the upside for the GBP and downside for the FTSE 100, with the stock market being more vulnerable. This article was written by Giuseppe Dellamotta at investinglive.com.
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