Ahead Of The BOE: “Super Thursday”

  • Bank Of England Rate Decision, Meeting Minutes & Quarterly Inflation Report
  • Thursday February 4th, 1200GMT
  • Current rate 0.50% expected unchanged

January Meeting

The Bank Of England’s January meeting was an expectedly lack-lustre affair with the BOE maintaining the Dovishness of recent meetings as they acknowledged continued market volatility, global growth concerns and sliding energy prices.  The BOE also noted that whilst declining energy prices weigh on inflation in the near term they may also support domestic spending which, along with investment, remains healthy. However, credit growth and productivity were both said to be “disappointingly low”.

Notably the meeting wasn’t as Dovish as some were expecting and talk that the BOE’s “Lone Hawk” Ian McCafferty was going to resign his vote for a hike proved to be unfounded as voting remained unchanged 8-1 in favour of rates on hold.

What’s Happened Since

With just three short week’s having passed since the last meeting we haven’t had much in the way of new data

On the positive side:

  • Dec CPI data showed inflation improved MoM, was in-line with expectations YoY and beat expectations YoY in Core inflation
  • The Unemployment showed a further contraction, falling to 5.1%
  • 4Q GDP Printed in-line with expectations at 1.9% YoY and 0.5% QoQ
  • Public Sector Net Borrowing was lower than expected in Dec
  • Mortgage Approvals were better than expected in Dec
  • Manufacturing PMI Jan was above expectations

On the negative side:

  • Retail Sales were well below expectations in Dec
  • Construction PMI Jan was below expectations
  • Average weekly earnings contracted again, falling back to 2% from recent highs of 3%
  • Net Consumer Credit was below expectations in Dec

The BOE’s November Inflation Report

Importantly, this meeting also includes an update of the BOE’s quarterly inflation report, a chance to check in on how the outlook has developed against that forecast and also provide updated forecasts for the next quarter and beyond.

Forecasts to focus on from the November report 

Q4 CPI Inflation                                  0.1       outcome =  0.1

Q4 GDP Growth                                  0.6       outcome =  0.5

Q4 Unemployment                             5.3      outcome =  5.1

Sterling Trade Weighted Index        91.3    outcome =  88

Oil Prices                                               32.5   outcome =  21.5  

Expectations For This Meeting      

  • Short Term Inflation Subdued, Medium Term Inflation?

The Dovish leaning of the BOE at this stage is well established given the tone of recent meetings and as such Thursday meeting, report and minutes are unlikely to mark a departure from this message. The continued slide in Oil prices is clearly a big problem and is keeping the global inflation outlook subdued. As such a downward revision to the short-term domestic outlook is likely though the medium-term outlook is not so clear with the January MPC minutes highlighting that members now foresee CPI inflation picking up “slightly more gradually” than forecast in November. Members will be pleased to note that inflation was at least in line with the 0.1% forecasted in November.   The BOE have also noted that whilst continued Oil weakness is negative for inflation in the short term it should be positive for UK growth in the medium term as it feeds through into stronger consumer spending.

  • Spare-Capacity Reducing

Similarly the level of spare capacity in the UK economy has reduced beyond levels forecasted in the November report with unemployment hitting a ten-year low at 5.1%. This development would be more pleasing to the MPC however, if wage-growth had continued with the positive momentum displayed over last summer when it struck 6 year highs. Wage growth momentum has reversed however and fallen back to 2%,  levels in line with January 2015, removing a key driver in the argument of those who last year were calling for a sooner-than-expected UK rate rise and indeed disappointing the MPC, with Mark Carney having previously commented that he would like to see wage-growth above 3% for considering a rate-hike.

  • Growth Under-performing

GDP growth has also underperformed the forecasts set out in November printing 0.5% in the fourth quarter and also hitting a three year low in the annual figure. Global growth risks stemming from the slowdown in emerging market economies alongside Brexit concerns, continued energy price weakness and global financial market volatility all weigh heavily on UK growth and again, downward revisions to at least the short-term outlook appear likely.

  • Sterling Strength Recedes

Alongside the diminished spare-capacity in the UK economy the MPC will also be pleased to note the diminished strength of Sterling as measured by the Trade Weighted Index which is down almost 7% from the November report and well below the forecasted 92 level. Sterling strength is commonly cited as a threat to the UK inflation outlook so this depreciation will be welcomed though is not likely to affect short term forecasts much with the MPC’s own analysis of the pass through effects on inflation from the exchange-rate suggesting the transmission takes several years.

  • Balanced Forecast The Most Likely Case

With expectations so heavily tilted to the Dovish side ahead of this release and market pricing so extreme (rate hike not priced in until November 2017) it is unlikely that any dramatically Dovish forecasts are likely to be seen and in-fact we could see some upward revision in the medium-term outlook space. This is not to say a Hawkish forecast is expected because a) risk factors are still so prominent and b) the BOE are likely to wait until it is certain that inflation pressures are building before shifting the tone of its messages. The most likely outcome appears to be Dovish message in line with recent output, whilst acknowledging some improvements since the last inflation report the likelihood of some further improvement around the medium-term horizon.

  • Reactions & Rates

Certainly worth noting that of the ten inflation reports Mark Carney has delivered, only one of those reports has fuelled  a move higher in UK rate-pricing, and as such a Dovish reaction is is the most likely outcome though the extent of this reaction may be muted given prospect of upward revisions to the medium term picture.

Trade Ideas

If Thursday fails to produce catalysts for continued GBP downside and we start to, the move could be quite sharp as positioning is so saturated to the short side, however it seems unlikely even in the event of a bullish reaction that the move will be sustained and so a correction higher in GBP should present better levels to sell.

Sell GBPUSD 1.4562 Stop 1.4662 Target 1.43

A retest of the 2015 lows should see strong supply, capping any upside reaction to the BOE on Thursday. Short into those lows targeting a move into 1.43 initially. guboe

EURGBP Buy .7485 Stop .7385 target 78 

A retest of the base which formed in EURGBP over the majority of 2015 should see strong demand kick in to take price higher once more. Long into those broken highs targeting a move into 78.eurgbpboe

Remember to join us tomorrow as we bring you live coverage of the full event including previews, analysis and reaction. We’ll bring you views from various Banks and macro-houses, other traders and of course be live tweeting the key details as we get them…