BoE meeting a risk event to Sterling
Sterling found weakness last week after members of the MPC commented that the BoE may have little reason to hike interest rates aggressively, after the new energy cap was announced by Liz Truss. The Pound managed to steady itself, but money markets have slashed chances of a 75bp hike and instead expect to see 50bp the outcome.
Interest rate hikes are seen as positive on the market, as it makes the country more attractive to investors and shows (on paper) a strong economy. The problem the BoE have is that the Government is now doing some of the heavy lifting in helping bring down inflation by capping energy costs to consumers. Inflation was expected to go 3%-5% higher in the coming months due to Ofgem's new energy price caps. With inflation now not expected to go much higher than the current level, what is the need for the BoE to continue to raise rates aggressively?
Well, on one-hand to simply keep up with other central banks and to aid in £ not falling from its current position near-term. Only a few analysts expect to see the 75bp call and for it to be the last aggressive hike in the cycle. This may well happen and could prove to be a positive situation for the Pound. But if we have to make our own call on what will happen, we think 50bp will be the statement and for less hiking to follow in the coming months. What will happen in this scenario is uncertain, however there are some investment banks which view this as negative and so are forecasting £ weakness.
The UK produces both inflation and retail sales data this week to keep traders guessing on what the BoE will do next week. Last time out with the latter, the UK showed a big miss on estimate and down came Sterling. Inflation is due to tick slightly higher, so may not move the market as much. There was some good news for the UK today though with the unemployment rate hitting a 48-year low. Wages are also rising faster than expected, but there is signs of cooling in the labour market with the number of job vacancies down. A tricky period ahead for GBP..