What to watch for in the BOE announcement
There’s likely to be no mon pol changes so it’s all about the forward guidance.
Firstly, the votes. Last time (March) it was 8-1 for leaving rates unchanged and we saw the two hawks moving from hikes to keeping rates unchanged.
The market is largely expecting 8-1 again today but after Ramsden’s recent dovish comments, there’s raised expectations to see him move to the cut side, thus making the vote 7-2. Depending on how big the 7-2 expectations are vs the 8-1 expectations, we might see a situation where an 8-1 is seen as a disappointment to the dovish crowd and GBP might actually go up on that.
Obviously a bigger than expected dovish surprise would be anyone else moving to the cut side to make it 6-3 or more, as that would hint that a rate cut is much closer.
So, the votes will be the first indicator of an impending change. The next thing will be the langauge in the statement.
It should be noted that there has been no hint of gaining any sort of confidence on inflation falling to prompt a a proper shift to cuts in the last statement and minutes, so any language that suggests the BOE’s restrictiveness has done its job and they’re now looking to the other side, will be the first real big shift towards cuts.
The next step from a hint of a cut to come, to an imminent cut, could be key phrase popping up. A few people have been highlighting that there’s been a BOE trigger phrase that’s preempted an actual change of policy, and that’s the inclusion of “in comming months” (eg “a change in policy likely in coming months”). When that phrase has appeared, it’s usually been followed by a policy change at the next meetings.
I personally think it would be a big step for the BOE to go from ‘we’re still restrictive’ to ‘we’re cutting very soon’, and skipping the ‘hint’ part. If they do, that would put June firmly in the frame and likely see GBP and gilt yields reprice quite sharply to that (GBP and yields down).
The reason why that would be a sharp move is because of the current expectations on the timing of the first cut. August is still the favoured month but June has been gaining traction. Overall though, the market still only sees a full 25bps cut by the Sep meeting, and we’re still only pricing just about 2 cuts by year-end. If today they jump straight to an ‘imminent cut’ stance, we’ll get the date shift, and likely an increase in the amount of cuts too.
Lastly, we have the forecasts, which are really only going to affect the market’s expected timeline for cuts. These forecasts will likely be secondary and have a lesser impact vs any explicit language changes in the statement. If there’s no change in the statement, they may have a bigger impact for the market adjusting its timeline (eg, significantly lower inflation forcasts bringing forward the timeline, and even the amount of cuts).
Overall, the broad market view is that there will be some sort of dovish shift today, and we just need to see how much of a shift it is. If we know the market is leaning that way, we then know the bigger price risk is if the BOE don’t make any sort of shift, and stay as they are in expectations and language. That would see GBP rally strongly.
For price move expectations, none of this will be a huge game changer. Everyone knows we’re heading for cuts, it’s just a question of when. Yes, GBP is a volatile currency so we should expect some decent moves but I shouldn’t think we’re going to smash out of any of the bigger ranges.
For cable, I’d think that 1.23-1.27 would probably contain.
EURGBP likely 0.8500-0.8700.
But, we should never be complacent with GBP so while it’s ok to think about ballpark numbers and ranges, it’s more important to let the quid do it’s thing and then match it with the details to see if the move is justified, or overdone. That’s what I’ll be doing anyway.
As always, trade safe and I hope the market treats you kindly.
