Ahead Of The BOE

  • Bank Of England January Meeting
  • Thursday November 5th, 1200GMT
  • Current rate 0.5%, expected unchanged

December Meeting

At the December meeting the Bank Of England delivered a Dovish outlook citing the recent continuation in Oil prices declines as “increasing the likelihood” that inflation will remain subdued.Alongside the subdued inflation outlook the BOE also noted a recent slowdown in pay growth, which is a key factor in their rate setting decision process.

Despite the flat inflation outlook and slow down in pay growth the BOE did note some positives. The softer spending cuts announced by Chancellor Osborne last month are expected to boost GDP next year by 0.2% whilst near term they see Q4 GDP growing at a similar pace to Q3.

Regarding global factors the BOE noted that there was “little evidence” of greater than expected spillover effects from the slowdown in emerging markets and noted also that risks to emerging markets remain the same even if the US do raise rates later this month. Market reaction to the meeting saw a

What’s Happened Since

Extending losses since the December meeting, Sterling is over 600 pips lower against the US Dollar as Non-Commercial players have steadily increased short positions. A disappointing economic landscape alongside Brexit and global-growth concerns have weighed heavily on investor sentiment with rate-hike expectations pushed out into May 2017.

Data since the last meeting has been mixed.

On the positive side:

  • Inflation rebounded to 0.1% from -0.1% previous and 1.2% from 1.1% on core
  • Unemployment rate declined to 5.2% from 5.3
  • Retail sales beat expectations improving to 3.9% from 3.2% previous
  • Net Consumer Credit beat expectations, improving to 1.5bln from 1.2bln previous
  • Net Lending improved to 3.9bln from 3.6bln

On the negative side:

  • Average weekly earnings fell back to 2.4% from 3% previous
  • Public Sector Net Borrowing was more than expected at 13.6bln
  • 3Q GDP was below expectations at 2.1%
  • Manufacturing and Services PMIs both disappointed
  • Trade Balance data showed a wider deficit than expected
  • Industrial & Manufacturing production data both printed below expectations

The Global Picture

Since the Bank Of England last met to discuss its monetary policy there have been several key developments.

The Fed finally initiated lift-off in the US, raising interest rates by the expected 25bps. Over the course of 2015 many layers felt that the Fed moving on rates would be bullish for GBP with the UK seen as the next G10 economy to raise rates but given the unwinding of UK rate-hike expectations, lift-off riven USD strength has weighed upon Sterling.

Oil prices, which had corrected higher into the end of 2015 have begun the year with sharp losses as a supply glut and subdued demand outlook continue to weigh upon the market. These continued declines further dampen the global inflationary environment, pushing the Bank Of England’s inflation target further out of sight.

Another factor in the continued Oil price declines, and a separate issue facing the BOE, is the resurgence of concerns surrounding the slow-down in China.Just last week Manufacturing data weakness prompted a 7% loss in Chinese equities triggering “circuit-breakers” which halt trading. The developments saw widespread global equity losses as investor sentiment was impaired with over £85bln wiped off the FTSE100.

Expectations For This Meeting

This meeting is likely to be very similar to the last with the BOE highlighting the dampened inflation forecast stemming from continued Oil price declines. Regarding the domestic economic picture Unemployment data, retail sales and lending have improved whilst wage growth and GDP continue to disappoint. The recent depreciation of Sterling will be welcomed by the BOE who have expressed concern about its strength. The BOE’s assessment of the threat from further Chinese-driven market volatility will be a key focal point of this meeting given the Bank’s previous statement that there was “little evidence” of greater than expected spillover effects from the slowdown in emerging markets.

Trade Idea

Recent declines in Sterling have seen are most notable against the US Dollar but in terms of best opportunity for trading tomorrow’s meeting EURGBP is my preferred vehicle. The base in EURGBP is developing nicely with price recently having broken through the key .75 area resistance level supported by bullish Order Flow and VWAP. If price can sustain above this level, the initial target is a move into the late .77s area where resistance is formed at the 2012 and late 2014 lows.

  • Buy a break of the .7550 highs targeting a move up into the late .77s resistance level