BOE Meeting Preview

Another rate hike is broadly expected, but there will be a keen focus on the voting to judge the level of dissent and as a clue for when the BOE will hike again.

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It's about the path

The BOE has already made history in terms of consecutive hikes, but analysts are pretty convinced another one is coming at the meeting tomorrow. The markets have already adjusted to that expectation, so the reaction could be a bit muted.

Keeping in mind the "very tight line between inflation and recession”, as Bailey keeps noting, at some point, the Bank could decide to pause to see the impact of policy. If the BOE raises rates as expected, they'd return to 1.0%, the highest since 2009.

It's about the future

Facing the prospect of a recession if tightening happens too fast, the BOE might be interested in communicating to the market that they aren't going to be as aggressive as thought. The market anticipates rates ending at 2.25% this year, meaning five more hikes after tomorrow's. But because of the fears of a recession, the pound has been weaker, exacerbating the inflation problem.

The BOE could try to temper this outlook by adjusting its language. For example, it currently expects inflation to start tapering off in June, with unemployment slowly rising. The BOE could do things like mention further "modest" hikes, or that inflation will be less than anticipated. On the flipside, if they note that inflation has been rising, or that the economic outlook has improved, this would leave markets thinking that the BOE will deliver on more rate hikes.

It's about the vote

At the last meeting, one member voted against raising rates. If more members joined, then that could be a sign that the BOE is likely to pause at the next meeting, which would be interpreted as a shift away from tightening. 

Even with a 50bps hike by the Fed, a hike by the BOE would still leave an interest rate spread in favor of the sterling. But it might not be enough to overcome recession fears and keep the cable under pressure.

GBP/USD at golden pocket

GBP/USD’s downward trend accelerated a couple of weeks ago when the fx pair broke outside the descending channel starting on June 1st ’21. That came following a rejection at the 200-week average on Jan 10 ’22 and a second weak attempt a few weeks later. 

After reaching the ‘golden ratio’ 61.8% Fibonacci retracement of the rally from the March ’20 low at $1.2420 last week, evident support can be observed as we trade near the round $1.25 level.

A decent bounce could bring prices up to major resistance at the 50% Fibonacci as well as the the lower channel trendline. Golden ratio levels break, however. Losing $1.2420 would open up the room to 79% just below $1.20. 

Source: SpreadEx

Key takeaways 

The Bank of England is expected to raise rates again, but the reaction in the markets might be muted. The BOE is worried about the UK economic outlook and might try to temper expectations of a recession by adjusting its language. If more MPC members vote for a no hike the bank will likely pause at the next meeting, which could be interpreted as a shift away from tightening and bearish for the GBP.