- The BoE meets on Thursday but low expectations for significant announcements
- Quarterly projections could support market expectations for rate cuts
- Pound would benefit against the US dollar from a hawkish BoE meeting
First rate-setting meeting for 2024
The Bank of England holds its first gathering for 2024 on Thursday at 12:00 GMT, a day after the respective Fed meeting. The same setup in December 2023 proved favourable for the pound as during the December 13-15 sessions it managed to record a quick 2.5% rally against the dollar. The main reason was the divergent rhetoric of the two central banks, with the market getting excited by the comments such as “the decision to hike or to hold was again finely balanced” appearing in the December BoE statement.
What has happened since December 14?
Going into this week’s meeting and data releases have been mixed since December 14, forcing the BoE doves to minimize their rhetoric to a minimum. Inflation remains elevated with the core CPI component proving stubborn and still hovering north of 5%. Retail sales have taken a dive despite the fact that average earnings remain very strong and cause concern in the BoE corridors about future inflation. Interestingly, PMI surveys are edging higher and potentially opening the door to a gradual growth acceleration.
Having said that, the overall rhetoric at this meeting will most likely be a tad more dovish than the December one, but not as dovish as the market might be hoping for. Therefore, in order to justify its 100bps of rate cuts expectations for 2024, the market will most likely pay more attention at three factors: 1/ the number of BoE members voting in favour of a rate hike, 2/ Governor Bailey’s possible effort to add a dovish twist at the press conference, and 3/ the quarterly projections.
How many will vote for another rate hike?
BoE members Greene, Haskel and Mann have been very quiet lately but considering the incoming data, analysed above, it looks unlikely that they would change their stance at this meeting. This is very important for market sentiment as a reduction in the number of the BoE members voting for a rate hike at this meeting would immediately commence the countdown for the much-touted rate cut, currently priced in for June 2024.
On Thursday there is a press conference taking place with Governor Bailey having the chance to further explain the BoE’s thinking process. He has always been a true believer of BoE’s inherit dovishness and, despite the record-breaking inflation in the 2022-2023 period, he managed to keep rate hikes to a minimum. Considering his monetary policy pedigree, there is a risk of him appearing more dovish than circumstances currently demand.
Quarterly projections to play a key role
At the end of the day, the quarterly projections would stir up the discussion. The November Monetary Policy Report had headline inflation dropping to 3.1% and 1.9% by the end of 2024 and 2025 respectively. Any hint of an upgrade in the latter figure could somewhat derail market expectations.
Similarly, the year-end Bank Rate projections for 2024 and 2025 in November 2023 stood at 5.1% and 4.5% respectively. This means that in November, the BoE staff were expecting a single 25bps move lower during 2024. More rate cuts could be added to Thursday projections, but it looks premature for the BoE to fully adopt the market’s current stance of four rate cuts in 2024. Therefore, a figure around 4.8% could please the BoE doves and the market without angering the more hawkish members of the Bank of England.
Pound’s performance to be driven by the Fed and BoE meetings
Pound bulls would clearly enjoy a repeat of the December post-meeting performance in the pound-US dollar pair. For this outcome to take place, the Fed has to be more dovish than currently expected and the BoE more hawkish than foreseen. In this case, pound-dollar could finally overcome the 1.2750 level, which has been acting as a strong resistance point in the past two months, and then have a go at reaching 1.3011.
On the flip side, should the BoE send a strong dovish signal, pound bears could have the chance to push the pound-dollar pair much lower. There are numerous support levels on the way down with the 200-day simple moving average at 1.2552 level being the most plausible target for the pound bears.
