What to expect from this Thursday’s Bank of England MPC meeting

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9 May 2018

thomasdodds

Sterling slipped to a fresh four-month low against the resurgent US Dollar on Tuesday, as investors continued to bet that the Bank of England would keep interest rates on hold at its MPC meeting on Thursday.

F
inancial markets had been pricing in a near 90% probability of a May rate hike only a few weeks ago, after two members of the committee unexpectedly voted in favour of higher rates at the March meeting. Macroeconomic data in the UK since the then has, however, taken a significant turn for the worse. The recent high levels of inflation, undoubtedly one of the primary drivers behind the need for higher interest rates in the UK, have eased, while first quarter GDP growth, retail sales, earnings and the latest PMIs have all missed expectations. Bank of England Governor, Mark Carney, also dampened expectations further during a BBC interview in late-April, suggesting that policymakers at the BoE may be in no rush to raise rates again following the last hike in November.

Heading into tomorrow’s meeting, markets are pricing in around a 10% chance of a rate increase. Currency traders will potentially be looking for clues in the Inflating Report and Carney’s press conference that could suggest whether the process of policy normalisation is either put off for the foreseeable future, or merely temporarily delayed. We certainly err towards the latter and expect the central bank to keep its options open for an August hike, depending on a rebound in hard economic data.

Italian snap election concerns send Euro to December lows

During London trading yesterday, the Euro continued on its recent march downwards, falling below 1.19 versus the USD for the first time since late-December. Investors continued to pile into the Dollar in the past few sessions, with a drop-off in economic activity globally causing investors to refocus on the widening in interest rate differentials between the US and almost every other country. Currency markets appeared unfazed by Donald Trump’s announcement yesterday that the US would be withdrawing from a nuclear deal with Iran.

An emergence in downside risk out of Italian politics has also caused some investors to rethink their long bets on the common currency. Italy’s two largest parties, the League and Five-Star Movement Party both opposed a proposition to rally behind a ‘neutral government’ on Monday, causing investors to fret that another snap election could be called in the Euro-area’s third largest economy.

With no major economic releases in either the Eurozone or US today, currency markets will await this evening’s monetary policy meeting from the Reserve Bank of New Zealand.