BOE to Hold, But Vote Could Move Cable

Despite the recent surge in energy prices, markets expect the BOE to hold this time around, but there is considerable disagreement about what happens next, which could move markets.

Factors Driving the Market

• Markets and economists agree on no hike for Thursday but disagree about September hike odds.
• Markets are expecting the BOE to lay the groundwork for a September hike but could be disappointed if Bailey takes a more cautious approach.
• The market expects a repeat of the 7-2 vote to hold, with more dissenters seen as hawkish, while a unanimous or three-way split vote would convey dovishness.

Economists and Market Disagree on the Outlook

When it comes to the BOE's meeting on Thursday, economists and the market are pretty much agreed that monetary policy will remain unchanged. This comes after UK inflation in June was softer than expected, despite a rise in crude prices, as the Strait of Hormuz remains effectively closed. However, there is considerable disagreement over what happens next, and that could jostle the market as traders take a close look at the meeting to see if and when a rate hike will occur. Economists are fairly confident that the central bank won't raise rates for the rest of the year, but futures are now pricing in a 2/3 chance of a rate hike at the September meeting. In that case, traders are likely to expect some hawkish signal from the BOE, and if that doesn't materialise, it could weigh on the pound.

If the BOE doesn't signal a rate hike is coming, it would be at odds with its major peers, as markets are also fairly certain the Fed and ECB will hike in September. While lower rates would usually leave the pound worse off compared to its peers, markets are concerned about the fiscal impact of a rate hike. If inflation forces the BOE to tighten this year, then analysts see the new Burnham government facing a difficult budget next year amid slower growth and increased spending. This could sap investor confidence in the pound, meaning it could counterintuitively rise if the BOE suggests it is likely to hold for the next few months.

The Vote that Matters

What could move the market is the vote split. Last time, the vote was 7-2 to hold, with the dissenters arguing for a hike. The hawks were led by Chief Economist Huw Pill, who has continued to argue for a more hawkish stance amid inflationary pressures from higher energy prices. The market is likely expecting a repeat of the 7-2 split, but if more MPC members join the dissenters, it could be seen as more hawkish. This would align with market expectations for a September hike. On the other hand, if the number of dissenters drops or there is a three-way split, adding a policymaker seeking a cut would likely be a dovish surprise. Then it's the turn of Governor Andrew Bailey's post-rate decision press conference. Markets seem to be expecting he will give some hints to prepare for a rate hike in September. If he doesn't, that could also provide a dovish surprise. Cable's moves will have to be contextualised alongside the Fed decision, as a more dovish BOE could support sterling.

Cable in Range Ahead of BOE

GBPUSD has slipped under 1.3300 recently, peaking at a local low in at 1.3273 at the lower Bollinger Band after failing to break above 1.3363. With the Bands consolidating roughly at these levels and prices trading in the lower area below the median BB, a break below 1.3273 could open the door to 1.3140 should 1.3200 fail to hold. On the other hand, a move back above 1.3316 and 1.3350 could signal the end of a flag-like pattern and pave the way for 1.3400, especially if the RSI divergence is respected.

Source: SpreadEx | GBPUSD, 4-hour Chart