- Despite hawkish BoE, investors don’t expect more hikes
- Friday’s GDP data expected to reveal slight contraction
- Employment and CPI data to follow next week
- Accelerating inflation may be the pound’s only hope
Investors don’t buy BoE’s hawkish hold
Last week, the Bank of England decided to keep interest rates unchanged via a 6-3 vote, with the three dissenters favoring a 25bps hike. In the accompanying statement, officials noted that policy must stay restrictive for an extended period, and that further tightening may be required if there is evidence of more persistent inflationary pressures. At the press conference, Governor Bailey said that inflation is still too high and that they are determined to take it all the way down to 2%, adding to the decision’s hawkish flavor.
That said, even after the BoE’s ‘higher for longer’ message, investors continue to see only a 15% probability for another quarter point hike by February and around 70bps worth of rate cuts by the end of next year.
Did the UK economy contract in Q3?
With the Bank estimating flat economic growth for Q3 this year, Friday’s official GDP data for the quarter may attract special interest. Expectations are for the economy to have shrunk 0.1% q/q after growing 0.2% q/q in Q2, with a contraction supported by the UK composite PMI, which fell from 50.8 in July to 48.6 in August and then to 48.5 in September.
A negative growth rate could confirm the market’s view that BoE policymakers may be forced to press the cut button earlier than they currently believe, bringing the pound under selling interest. That said, the British currency may not suffer huge losses if the contraction is mild as traders may decide to save ammunition for next week’s employment and inflation data, on Tuesday and Wednesday respectively. For investors to sell the pound and forget next week’s releases, the GDP growth rate may need to miss the forecast by a decent margin.
Risks surrounding inflation tilted to the upside
Given that Governor Bailey said after last week’s meeting that whether GDP growth is slightly negative or slightly positive will not impact monetary policy, next week’s data may prove more important in shaping expectations about the Bank’s future plans if indeed the GDP figure comes in at -0.1%.
Both the headline and core CPI rates are more than three times the BoE’s target of 2%, which means that policymakers’ mission is far from accomplished and that indeed some further tightening may be needed, despite market participants not sharing that view. According to the UK PMIs for the month, prices charged by companies accelerated to a three-month high in October, tilting the risks surrounding the CPI report to the upside.
Wage growth to be monitored as well
On the other hand, the KPMG and REC UK report on jobs pointed to a further easing of overall pay growth, which means that Tuesday’s data may reveal a slowdown in average weekly earnings. Having said that, a small slowdown in the excluding bonuses rate from 7.8% is unlikely to be a reason for complacency. For investors to maintain a low probability for another rate hike by the BoE and keep several rate cuts for next year on the table, the CPIs on Wednesday may need to reveal a slowdown as well, or the wage growth rate may need to slide to levels that will raise speculation of lower inflation in future months, even if Wednesday’s CPI rate sees as small rebound.
Pound’s technical outlook remains cautiously bearish
Cable rallied on Friday following the disappointing US employment report, but with the US dollar staging a shy comeback this week, the pair returned below the key territory of 1.2310. If the GDP data suggests that the economy contracted by more than anticipated, the pair is likely to continue drifting south, especially if wages slow as well next Tuesday. However, whether the slide will extend to reach the round figure of 1.2000 may depend on Wednesday’s CPI data.
For the pair to return above 1.2310 and perhaps violate its 200-day moving average, even if economic growth and wages slow somewhat, the inflation data may need to reveal a rebound in both the headline and core rates. In such a case, the bulls may feel confident to climb towards the 1.2600 zone.
