Bank of England Preview: The Hawks v Doves Rankings
- Written by: Gary Howes
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The Bank of England could deliver some notable volatility to the British pound on Thursday the 5th of November.
The date will see the release of the November policy decision which is certain to see interest rates unchanged. Volatility for the pound sterling exchange rate complex could however stem from the minutes to the meeting which are released alongside the decision.
These events occur at 12:00 GMT.
At 12:45 we jump straight into the quarterly Inflation Report - a highlight in the GBP calendar as it sets out in more detail the thinking of policy makers.
Moves in sterling will likely come on how many members of the BoE vote for an interest rate rise.
Ian McCafferty will likely remain the sole dissenter to keeping interest rates unchanged, given his continued hawkish commentary since the October meeting.
Kristin Forbes and Martin Weale could however vote to raise interest rates in what could prove to be a major GBP-positive.
"Overall, the MPC continues to face the dilemma of a relatively resilient domestic economy in which inflationary pressures, while weak, may well be on a rising path and a weakening external environment that, via a strong exchange rate, is imparting considerable and persistent disinflationary/deflationary pressure on the economy," says a currency note from Barclays.
Robert Wood at Bank of America Merrill Lynch says he expects a measured hawkish nudge from the BoE as there has not been enough downside news for the BoE to justify the decline in market interest rate expectations since August.
The BoE was already bearish relative to consensus on Chinese growth in August, while wages and unemployment are beating BoE forecasts.
Uncertainty about the global outlook warrants some additional caution.
"They are unlikely to try and jolt markets, in our view. However, they have also been signaling a change in focus towards rate hikes for several quarters, with their above target three-year ahead inflation forecasts,” says Wood.
With annual headline inflation non-existent and core annual inflation just 1.0% – a long way from the BoE’s 2% target – the chance of BoE rate hikes in the near future is low argue Barclays.
What Does it Mean for the GBP to USD Exchange Rate?
From a currency market angle, strategists retain their cautious view of modest GBP outperformance versus the EUR but material depreciation against the USD, as UK fiscal headwinds are building and the impending EU referendum remains underpriced.
Dr. Vasileios Gkionakis, the Head of FX Strategy at UniCredit Bank in London, says the risks lie to the upside for the British pound.
"We expect the IR to be less dovish and see the main risk being that one or two members join Ian McCafferty in voting for a hike. Hence, we believe GBP-USD should reverse its recent sell-off since mid-October," says Gkionakis.
Importantly suggests the UniCredit analyst, even with a single dissenter in the MPC, the inflation report will probably prove less dovish than markets expect, as the stimulus from the lower yield curve is likely to more than offset the downside risks emanating from China and other emerging markets.
"Consequently, we think that cable has room to reverse its recent sell-off since mid-October," says Gkionakis.
