Tomorrow the Bank of England’s Monetary Policy Committee (MPC) will deliver its latest rate decision together with its vote breakdown, inflation outlook and Monetary Policy Summary. Following this, at 12:45 GMT, Governor Mark Carney and other MPC members will hold a press conference to discuss the inflation report.
Once again there’s no expectation that the MPC will announce any change to either its Base Rate or Asset Purchase Facility (APF). The Bank’s headline interest rate has been held at 0.5% since March 2009 while the APF has been held steady at £375 billion since July 2012.
But the press conference could prove interesting, and if last November’s is any guide, it could lead to some fun and games for sterling. Back then sterling slumped. Cable fell from 1.5400 ahead of the meeting to just above 1.5000 twenty four hours later – the result of a bit of dovishness from members of the MPC.
Quite a lot has changed since November. Back then global equities had recovered most of the losses which followed China’s summer melt-down. Back then the US Federal Reserve had delayed a rate hike – again. Back then crude oil was trading around $45 per barrel.
Since then we’ve had another burst of China-inspired market turbulence which has undermined investor confidence. We’ve had a rate hike from the Fed. We’ve seen crude oil break below $30 per barrel and we’ve had additional monetary stimulus from the ECB, Bank of Japan and People’s Bank of China.
It’s worth noting what has happened to Cable since the November Inflation Report. In this daily GBPUSD chart below I’ve circled the November sell-off and drawn on a Fib Retracement from the early November high to last month’s low of 1.4083. Sterling has jumped today but is still in “no man’s land” between the 0.24 and 0.38 retracement levels. The recent recovery can be put down to a re-evaluation of the Fed’s 2016 rate hike projections. It seems very unlikely that the Fed will raise rates by a full 100 basis points this year. In fact, if financial conditions continue to deteriorate it could be that they end up reversing their hike as early as this summer.
Much of the UK’s recent economic data has been encouraging. Unemployment is at its lowest rate since 2005; the Manufacturing and Services PMIs are expanding steadily; Construction is also expanding although the pace is slowing. On the flip side, December retail sales fell 1% for the month while CPI is running at +0.2% annually thanks to declining food and energy costs. Also, Preliminary fourth quarter GDP showed that growth was a tepid +0.5% for the last three months of 2015. The CBI took that number as proof that the UK economy is running out of steam.
Mark Carney has been relatively dovish of late and an increasing number of analysts now don’t expect a rate hike from the Bank until 2017. If he continues in this vein tomorrow then cable could give back recent gains. However, Mr Carney has “previous” when it comes to flip-flopping his views. While unlikely given recent action from other central banks, just a hint of hawkishness could lead to a significant sterling rally.
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