On its second "Super Thursday" of the year, the BoE kept its policy unchanged via a 7-1 vote, in line with the consensus. The lone dissenter was Forbes again, who voted for a hike, but considering that she is leaving the Committee in June, her dissent may have carried less importance for investors. There was speculation that we may have had another member, Saunders, dissenting this time. However, he preferred to stand pat, which may have come as a disappointment to those who were expecting a second vote for a rate increase. Turning to the Inflation Report, the BoE lowered its inflation projections for 2018 and 2019, which diminishes further the probability for a hike due to inflation overshooting in the foreseeable future. As a response to these, the pound tumbled.
The only point that appeared hawkish on a first glance was the final sentence of the minutes. The Bank noted that if the economy remains robust, policy could be tightened by a somewhat greater extent than the market yield curve currently implies. However, after digging into the Inflation Report, we noticed that both the market and the Bank have pushed back their expectations for a 25bps rate increase. The market just pushed it back further. According the market, such a move is fully priced in for Q4 2019, so even one quarter earlier is in line with the Bank’s view, and is thus not as hawkish as it initially appears.
All these signals from the BoE confirm our view that the Bank is likely to remain on hold throughout this year, and even the next one if the data evolve more or less in line with expectations. As for the pound, we think that GBP traders are now likely to turn their attention back to developments surrounding the upcoming General Election. In our view, incoming opinion polls that show the Conservatives maintaining or extending their current lead could support sterling as we approach Election Day.
GBP/USD slid following the Bank’s signals, falling below the (support now turned into resistance) barrier of 1.2900 (R1) to hit the key hurdle of 1.2850 (S1). Then the rate rebounded somewhat. The pair has been oscillating between that hurdle and the psychological zone of 1.3000 (R2) since the 27th of April, so given our proximity to the lower end of that range, we see the likelihood for further rebound in coming days. A break back above 1.2900 (R1) could confirm our view and is possible to set the stage for another test near the round figure of 1.3000 (R2).
Today’s highlights:
During the European day, we get Germany’s preliminary GDP data for Q1 and the forecast is for economic growth to have accelerated. We also get the nation’s final CPI for April, as well as Eurozone’s industrial production for March, though none of these indicators is usually a major market mover.
From the US, we get US CPI and retail sales data, all for April. Kicking off with the CPIs, the forecast is for the headline rate to have ticked down, and for the core rate to have remained unchanged. In case of an unchanged core print, we think that investors may focus primarily on retail sales, which come out at the same time. Both the headline and core retail sales rates are expected to have risen notably in monthly terms. Following two consecutive months of soft prints, we think that a rebound would be encouraging news for FOMC policymakers, who at their latest policy gathering noted they expect GDP growth to pick up speed in Q2. Strong retail sales could be a sign the US economy entered Q2 on a solid footing, and may thereby bring USD under renewed buying interest. We also get the nation’s preliminary U of M consumer sentiment index for May.
USD/JPY traded lower yesterday after it hit again resistance at 114.35 (R1). Nevertheless, the setback was stopped by the short-term uptrend line drawn from the low of the 21st of April, near the 113.50 (S1) support area. Strong retail sales today may encourage the bulls to take advantage of yesterday’s retreat and pull the trigger for another test at the 114.35 (R1) obstacle. If they manage to overcome it, they may set their sights on the next resistance of 114.90 (R2).
We have three speakers on the agenda: ECB Vice President Vitor Constancio, Chicago Fed President Charles Evans and Philadelphia Fed President Patrick Harker.
