Ahead Of The BOE

  • Bank Of England May Meeting,
  • Thursday May 12th 1200GMT
  • Current rate 0.50% expected unchanged
  • Current voting 9-0 expected unchanged

Last Meeting

In their April rates meeting the Bank Of England voting unanimously to keep rates on hold at current 0.50% levels citing potential risk to Q1 growth from the forthcoming EU referendum which they also say is making data harder to interpret and as such will be reacting more cautiously than normal. On the plus side the bank did note that the combination of stronger Oil and weaker Sterling is likely to stoke inflation and that disappointing US GDP is mitigated by a shrinking Chinese risk.

Data & Developments

Data since the last meeting has taken a mainly negative skew headlined by the following:

  • Retail sales Mar 1.8% vs 3.8%
  • GDP YoY 1Q 2.1% vs 2%
  • Manufacturing PMI Apri 49/2 vs 51.2 – Moved into negative territory for the first time since March 2013
  • Construction PMI April 52 vs 54
  • Services PMI April 51.9 vs 53.2 – Lowest since Feb 2013
  • Manufacturing Production YoY Mar -1.9 – Biggest fall since 2013

The key takeaway from these data points is the severe decline in the UK Manufacturing sector which is likely to act as a drag on the economy in the second quarter and also puts even greater pressure on the services sector (which is also suffering) to support GDP growth.

The other hugely significant development which has added further weight to concerns for the UK economy is the matter of Brexit. Latest polls have continued to show a majority in favour of the “Vote Leave” campaign. A plethora of industry experts have continued to warn of the likely damage to the UK economy from such an event and reports have emerged revealing that BOE Governor Mark Carney has been discussing with various bank’s the possibility of a rate cut in the event of Britain leaving the EU.

In contrast to this view however, the BOE’s newest member (Michael Saunders formerly of Citi who joins the MPC in August) claims that in the event of a Brexit, the BE would be forced to raise rates as high as 3.5% in the following 18 months to battle the inflation that would come as Sterling collapsed.

Expectations For This Meeting

In the months since the BOE last updated its inflation report in February, we’ve seen Oil prices rise whilst Sterling has fallen and markets have further pushed out rate hike expectations until atleast 2019. This suggests that there could be room for a more hawkish update to the report however two key sticking point foil this view: the economic recovery in the UK has weakened and the prospect of Brexit threatens the economic outlook further.

Importantly, the BOE’s forecast (being the last one before the referendum is due to take place in June) will not consider two alternatives (premised on a leave vote or a stay vote) but rather will assume the status-quo will remain and the remain vote will win though Carney is expected once again to allude to the potential damage that a leave vote would cause. The outlook and forecasts however will likely reflect the BOE’s “wait and see” approach given the upcoming referendum which might be the only thing stopping the BOE from unleashing further stimulus to boost the ailing economy.

Trade Ideas

GBP Bearish Idea

  • The recent decline in GBPUSD has taken price back down into an area of key support formed at broken March and April resistance levels. With price sitting just on top of these level, as well as rising trend line support. If price sustains a break of this key support region breakout traders can target a move down into the 1.4250 region initially. Alternatively, look to use that broken support level as an area to set shorts.

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GBP Bullish Idea

  • The rally in GBPAUD has taken price up into a challenge of key trend line resistance where momentum has contracted and price has subsequently stalled. A series of inside day candle suggest we could see another break higher and if the ensuing BOE volatility favours a move north in GBP then playing a breakout here looks like a good option targeting a run up into overhead structural resistance initially.

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