Today is ‘Super Thursday’ in the UK. Besides the BoE rate decision and the meeting minutes, we also get the quarterly Inflation Report, which Governor Carney will present at a press conference after the meeting. The consensus is for the Bank to keep its policy unchanged via a 6-2 vote. Given that the votes are the first piece of information we get, we expect the initial reaction in GBP to depend primarily on that, and subsequently, on what signals policymakers send regarding the likelihood of a rate hike this year.
At its latest meeting, the BoE appeared quite hawkish, signaling reduced tolerance for above-target inflation (CPI was +2.9% yoy at the time). A few days later, Governor Carney and Chief Economist Haldane both hinted that a rate hike may be in the works at one of the upcoming meetings. Nevertheless, soon thereafter, data showed that inflation slowed notably (to +2.6% yoy), pouring cold water on speculation for an immediate rate increase. What’s more, although the labor market continued to tighten, both wage and GDP growth remain lackluster, enhancing the case for no action by the BoE this year.
At the time of writing, market pricing suggests roughly a 45% probability for a hike by year-end, which we think is reasonable given the data. The key question for GBP traders is: Will that probability rise or fall in the aftermath of this ‘Super Thursday’? On balance, we think it’s more likely to fall. The slowdown in inflation combined with uninspiring growth suggest that the BoE could signal less urgency than previously for a near-term hike. In addition, given the softness in Q2 GDP, there is a prospect for the Bank to revise down its growth forecasts. Bearing these in mind, we believe that the reaction in sterling today could be negative.
The key risk to our view is that despite economic developments suggesting a relatively low likelihood for a hike in the near-term, the BoE may want to keep speculation on that front alive in order to support the pound and thereby, curb inflation. In this case, Carney could say that the MPC discussed the prospect of a hike, but decided against it for now. Such signals, or a potentially closer-than-expected vote, could cause GBP to strengthen.
EUR/GBP has been trading in a consolidative manner during the last couple of weeks, between the support of 0.8890 (S2) and the resistance of 0.9000 (R2). Nevertheless, the overall path of the pair remains positive as marked by the uptrend line taken from the lows of November 2015. As such, we expect the bulls to drive the battle above the psychological barrier of 0.9000 (S2) in the not-too-distant future and initially aim for our next resistance of 0.9050 (R3). The trigger for such a rally could be a dovish BoE today. Even if the Bank appears hawkish and the pair tumbles, we would treat such a retreat as a corrective phase.
GBP/USD has been in an uptrend mode since the 21st of June. At the time of writing, the pair oscillates between the support of 1.3190 (S1) and the resistance of 1.3250 (R1). A dovish BoE today could cause the pair to tumble, but given that we expect the greenback to continue performing worse than the pound in the foreseeable future, we expect the bulls to take advantage of a potential retreat and aim for another test near 1.3250 (R1). Now, in case the Bank remains hawkish, the pair could break above 1.3250 (R1) without correcting lower. Such a break is possible to pave the way for our next resistance of 1.3350 (R2).
As for today’s economic data:
As for the economic data, we get the UK services PMI for July and expectations are for an uptick. Even though something like that could support GBP a bit, the currency’s intraday direction is likely to be decided by the BoE a couple of hours later. We also get Eurozone’s final Markit services PMI for July and the bloc’s retail sales for June. In the US, the ISM non-manufacturing PMI for July will be in focus. The forecast is for the index to have declined slightly, which may bring USD under renewed selling interest.
EUR/GBP
Support: 0.8920 (S1), 0.8890 (S2), 0.8830 (S3)
Resistance: 0.8975 (R1), 0.9000 (R2), 0.9050 (R3)
GBP/USD
Support: 1.3190 (S1), 1.3160 (S2), 1.3100 (S3)
Resistance: 1.3250 (R1), 1.3350 (R2), 1.3440 (R3)
