Ahead Of The BOE

  • Bank of England December Rate Decision & Monetary Policy Statement
  • Thursday December 10th, 12.00GMT
  • Current rate 0.5%, expected unchanged

November Meeting

The Bank of England’s November meeting passed as expected, with rates remaining unchanged and voting retaining an 8-1 split. However, whilst the outcome was as expected, the Bank delivered a far more Dovish monetary policy statement and accompanying inflation report than markets were expecting.

The statement noted that “the outlook for global growth has weakened since the August Inflation Report”  and the BOE were keen to highlight that “there remain downside risks…including that of a more abrupt slowdown in emerging economies.”

In assessing the low inflationary environment the BOE clarified that “the outlook for inflation reflects the balance between persistent drags from factors such as sterling and world export prices, and prospective further increases in domestic cost growth”, whilst noting that “the most likely path for inflation to exceed slightly the 2% target in two years and then rise a little further above it, reflecting modest excess demand.  The MPC judges that the risks to this projection lie slightly to the downside in the first two years, reflecting global factors”.

Market reaction saw GBPUSD sharply lower in response to the meeting.

What’s Happened Since

Following the sharp sell off in response to the November meeting GBP was broadly lower across the rest of November as UK rate hike expectations were unwound and Non-Commercial players loaded GBP shorts. UK data flow since the last meeting has been skewed to the downside with positive data over the period contained to a small pick up in core inflation and the continuing decline in the unemployment rate.

  • Average weekly earnings in the 3 months to September YoY remained unchanged at 3%, missing expectations of an improvement to 3.2%
  • The Unemployment rate over the same period however declined to 5.3%, the lowest it’s been since 2008
  • October CPI remained in negative territory for a second consecutive month, the first time this has happened since the index’s creation in 1997.
  • Core CPI however, which the BOE favour, actually improved to 1.1% from 1% prior and expected
  • October Retail Sales were disappointingly low printing 3% vs 3.9% expected
  • Public Sector Net Borrowing was higher than expected in October at 7.5bln vs expectations of 5.3bln
  • 3Q GDP printed as expected at 0.5% confirming the slowdown from the April-June 0.7% print
  • October Net Consumer Credit was below expectations at 1.2bln vs 1.3bln expected with Mortgage Approvals missing also at 69.6k vs 69.9k expected
  • Construction & Manufacturing PMI data sets both missed expectations whilst Services PMI rebounded to print 55.9 vs 55 expected.
  • Industrial Production for October improved to 1.7% beating expectations 1.2% YoY whilst Manufacturing Production fell to -0.1% over the same period.

Alongside the data releases we have also had comments from various BOE officials on the wires. BOE’s Haldane commented that in his view the risks to both UK growth and inflation were “skewed materially to the downside”, a sentiment echoed by BOE Governor Mark Carney, who stated that he believes low rates will remain so in the UK for “some time” to come, and BOE’s Vlieghe who remains comfortable with waiting to raise rates. These Dovish views were not shared by BOE’s Forbes however who believes that a tightening in labour market conditions and increasing pay pressures will cause the need for rates to be raised “sooner rather than later”.

The Global Picture

In their November meeting the BOE referenced the risks from the slowdown in global growth and the drag on inflation from factors such as world export prices and Sterling strength.

The global growth picture remains the same with concerns for emerging markets still abounding and data weakness out of China continuing to plague the global outlook. Commodity and energy prices have fallen further since the BOE last met with the recent failure by OPEC to address the oversupply in the Oil market pushing Crude down into a new six year low.

Sterling price might be the only positive development over the period with Sterling futures having fallen nearly 600 pips from their 1.5480s November high.

Expectations For This Meeting

It seems reasonable heading into this meeting to expect little departure from the BOE’s most recent assessment of the economy, the inflation environment and the proximity of a domestic rate increase.

Unlike the Bank’s “Super Thursday” meeting in November, which saw the release of the Quarterly Inflation Report, Rate Decision & Monetary Policy Meeting minutes, Thursday will see only the BOE’s rate decision 7 monetary policy statement alongside the asset purchase target. As such, there will not be as much information to digest as e had in November.

However, key points to look out for are as follows:

  • Reference to the continued decline in Oil prices and effects on inflation outlook – how does the Bank  view current Oil price declines and their impact on the inflation outlook?
  • Global growth concerns – Does the Bank perceive that risks from the slowdown in global growth have worsened since the last meeting?
  • Domestic economic data – How does the Bank view recent economic data and the near term economic outlook?
  • Sterling strength – How does the Bank perceive the recent price moves in Sterling?

Trade Ideas

Hawkish BOE

  • BOE Dovishness is clearly priced into current GBP markets with Sterling lower except against the commodity currencies, which are currently weaker on continued Oil price declines. If the BOE is seen to retrace recent Dovishness we are likely to see quite a sharp profit taking move in Sterling
  • GBPJPY is testing key support formed by the rising trendline from October 2014 lows and the recent 183.90 area support from late October 2015 lows.
  • Buy a bounce from this level targeting a move back up into recent highs at 186.30s initially.

Dovish BOE

  • A broadly unchanged economic assessment is unlikely to fuel much further downside in GBP, however, if the BOE seem to step up their Dovishness, for example in reference to continued Oil price declines it is possible that this will drive further GBP downside.
  • Sell a break of the rising trend line support and key horizontal support in GBPJPY