Financial market research and analysis

All eyes will look towards the Bank of England on Thursday, as the central bank prepares to update the market. This “Super Thursday” which sees the BoE release a triple whammy of data, in the form of the interest rate decision at 12:00 GMT, minutes from the monetary policy committee (MPC) meeting and the quarterly inflation report.

What to expect:

Rates on hold
Policy makers are broadly expected to keep rates on hold at 0.5%. However, that won’t stop traders scrutinizing the minutes for any further clues as to when the next rate hike could be. Last week, BoE Governor Carney gave some clues as to what we might expect tomorrow when he appeared in front of the House of Lords Economic Committee. Carney’s comments encourage markets to believe a rate rise could be on the cards as soon as Spring, as a result the pound rallied hard. However, political uncertainty thanks to growing unrest within the Conservative Party and increasing uncertainties over Brexit threaten to limit BoE action and have pulled sterling lower

Inflation to weaken back towards 2% target?
With no change in rate policy expected, the inflation report with revised forecasts will be the central focus. Since the rate hike three months ago, inflation has remained elevated at 3%, some considerable distance from the BoE’s 2% target. Furthermore, earnings growth has looked encouraging increasing by 2.6% in the three months to December. BoE Governor Mark Carney even suggested that early stages of wage growth could be happening. Yet with the recovery in the pound, over the past month which has seen it rally from its highest level since the Brexit referendum just two weeks ago, Carney & Co. will be hoping the stronger pound will do some of the heavy lifting to bring inflation levels lower.

Wait and See Mood
There is a possibility that they will feel emboldened by stronger Q4 growth and improved sentiment to discuss an alternative tightening path, this would most likely be considered an unnecessary risk. For the moment we expect the central bank to remain it its current “wait and see mood” as it tries to balance high price pressures against a back drop of Brexit uncertainties.

Potential market reaction:

The GBP/USD has had a volatile few months since the last rate hike. The rate hike in November produced a sell off in the pound, mainly thanks to the dovish manner in which it was delivered, as the BoE made no effort to hide concerns of a messy Brexit. The pound recovered quickly rebounding above $1.35.

More recently the pound was trading comfortably above the key psychological level of $1.40, hitting a post Brexit referendum high of $1.4347. The upwards move was a result of a combination of a weaker dollar and increased optimism over the health of the UK economy. However, GBP/USD dropped back below the $1.40 mark after strong US jobs data and higher US interest rate expectations sent the dollar soaring and the GBP/USD plummeting 230 pips.

Heading towards Thursday the pound is still trading just below $1.40. For the pound to make any serious head way we would need to see a more decisive signal from the BoE that they are actually considering an earlier rate hike. Should BoE hawks Ian MacCafferty and Michael Saunders vote to hike rates on Thursday then the pound could drive back towards resistance seen at $1.4120. On the other hand, if members vote unanimously to keep rates on hold and economic projections are only revised marginally higher, disappointment could see the pound drop below its recent low of $1.3835, before heading towards $1.38.

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