The GBP/USD pair has weakened on Thursday morning, as cautious sentiment prevailed in the market ahead of the highly anticipated Bank of England (BoE) monetary policy meeting. The pound remained unchanged for the day, reflecting the indecisiveness of traders over the past three days leading up to the “Super Thursday” session.
The upcoming Bank of England (BoE) meeting holds significant importance for the markets, as participants eagerly anticipate the release of the meeting minutes, the quarterly Monetary Policy Report (MPR), and Governor Andrew Bailey’s press conference.
The pound gets a boost
The cable pair had reached a fresh high not seen since April 2022 on the previous day, buoyed by disappointing US inflation data. However, a corrective bounce in the US dollar, has contributed to the GBP/USD pair’s recent movements.
The UK’s RICS House Price Balance for April showed improvement, while hawkish forecasts from the UK think-tank NIESR provided support for GBP/USD buyers.
Cautious optimism supports US dollar
The release of the US Consumer Price Index (CPI), which showed a YoY easing to 4.9% for April, disappointed market expectations. This marked the first time in two years that the figure dropped below 5.0%. Cautious optimism in the market supported the US dollar’s corrective bounce as investors awaited further clues on US inflation, particularly in light of China’s downbeat CPI and the potential for Sino-American diplomatic talks.
Goldman Sachs’ projections
The GBP/USD pair is expected to maintain its strength even if the Bank of England fails to hint at significant rate hikes in the future. Goldman Sachs noted that the bank’s monetary policy committee is projected to proceed with incremental 25 basis point rate hikes until reaching a terminal rate of 5% in August. However, it is anticipated that the Bank will not commence rate cuts until the second quarter of 2024, taking into account the resilient growth momentum. While UK inflation is expected to decline swiftly, it is unlikely to decrease sufficiently to meet the Bank of England’s 2% target.
What will markets look for in today’s monetary policy meeting?
While a 25 basis point rate hike is already factored into market expectations, three factors will shape market reactions: the voting pattern within the Monetary Policy Committee (MPC), the monetary policy report and Bailey’s press conference.
- In the previous rate decision, two members dissented by voting to maintain borrowing costs, opposing the majority of seven members. If a similar voting pattern emerges despite positive data, it could negatively impact the pound. Any additional members voting against a rate hike would be even more detrimental. The pound would only benefit if at least one of the dissenters changes their stance to align with the majority. An 8:1 or 9:0 vote in favour of a rate hike would be considered a surprising and hawkish shift, which could strengthen the pound.
- Secondly, the quarterly Monetary Policy Report, which includes inflation forecasts, holds significant weight on “Super Thursday.” While previous BoE projections indicated a decline in price pressures, markets expect upward revisions and the extend of these revisions will be crucial in determining market sentiment. If Governor Bailey and MPC members continue to project a substantial drop in inflation, the pound could face downward pressure. To support a rise in the currency, the forecasts would need to indicate above-target prices for the current year and 2024.
- A conference held by Governor Bailey and several of his colleagues scheduled at 11:30 GMT will also be important. In previous conferences Bailey made predictions of a recession, and investors will closely watch Bailey’s potential comments about the “terminal” interest rate. Any suggestion of uncertainty or lack of commitment to additional moves could weigh on the pound.
In conclusion, despite the British economy experiencing robust wage growth and accelerated inflation, the market has already priced in the data, and the BoE appears hesitant to guarantee further rate hikes. Unless Bailey and his colleagues firmly commit to more hawkish actions, the pound may experience selling pressure.
With the current volatility, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.