Market Report - 03/08/2023
MPC comittee split ahead of Bank of England rate decision ; Markets braced for volatile day
With todays Bank of England meeting expected to create vast volatility across the board, I thought a brief update may be useful.
The GBP has continued its two-day losing spell as investors seem cautious ahead of the interest rate decision by the Bank of England (BoE). The GBP/USD pair faces pressures of bearish market sentiment and fears of a deep recession in the United Kingdom as the central bank prepares to raise interest rates consecutively for the 14th time.
City investors remain mixed about the pace at which interest rates will be raised by the BoE. Money market pricing shows investors expect a 34 basis point hike from the BoE, which is effectively a split opinion on either a 25bp or 50bp move from the MPC. This essentially means there is volatility heavily expected following the BoEs decision on Thursday, with a split MPC committee likely to see either a substantial contraction or a strong rally.
Despite markets forecasting a split decision from the MPC; The case for a 25bp hike with a warning there could yet be more to come, could be deemed the most sensible outcome form Thursdays meeting, particularly given with inflation and house prices are falling.
GBP/USD has tested lows of 1.2680 in early Thursday trade, amid a cautious market mood as we approach the Bank of England monetary policy decision. This would be the 14th consecutive interest-rate hike by the BoE in which policymakers are expected to consider a 25 basis point (bps) increase to elevate interest rates to 5.25%.
The option of a second consecutive 50 bps rate push by the BoE is still in the picture, knowing that inflation in the United Kingdom economy is four times the required rate of 2%. Also, the recent recovery in oil prices and resilient consumer spending could force BoE policymakers to discuss a larger rate hike for the August policy.
The pound could be deemed vulnerable if the Bank of England doesn't hike by 50bp. Many analysts have been forecasting the potential for GBP/USD to retrace back to 1.25 and GBP/EUR possibly back to 1.1450 if the MPC committee is ‘dovish’ and opts for a 25bps hike, rather than 50bps. However, If Andrew Bailey and the BoE does opt for a further 50 point increase, the market consensus is bullish for the pound and we could see a level of outperformance. Investors and analysts will be keeping a keen eye on not only the interest rate decision itself, but the forward guidance / minutes released by the MPC in the aftermath.
Credit Suisse forecasts that one member (Swati Dhingra) is likely to vote for unchanged rates, but there are risks that if the majority vote is for 50 bps, one or two members vote for 25 bps. Apart from the interest rate decision, the outlook on inflation and the economy, and policy guidance for the remaining 2023 will be in focus.
If you would like any further information, or if you required a quote / would like to target a specific rate in anticipation of the BoE please do reach out.