GBP/USD: BoE to raise rates this week Macroeconomic overview:
- On Thursday, the Bank of England will simultaneously publish the August Inflation Report, the MPC policy decision and the minutes of the MPC meeting ending on 1 August. This will be followed by a press conference with the Governor, Mark Carney. We expect the MPC to raise the bank rate by 25bp to 0.75%, possibly with a minority dissenting.
- The background to the meeting is that, in June, the MPC turned surprisingly hawkish on three accounts: 1. a third MPC member, Andy Haldane, joined Ian McCafferty and Michael Saunders in voting for an immediate hike; 2. the MPC was more confident that the weakness in the first quarter of 2018 would prove temporary; and 3. the MPC lowered its threshold for starting balance sheet reduction (to a bank rate of 1.5% from 2.0%). Since the June meeting, the data has been mixed but on balance positive. Business surveys have continued their recovery with the composite PMI rising to around its historical average, indicators of consumer spending have rebounded somewhat (although retail sales fell back in June), and employment growth has been strong. The Office for National Statistics’ monthly estimate of GDP growth in May was a solid 0.3% mom. Set against this better news, average weekly earnings growth excluding bonuses fell to 2.7% yoy in the three months to May (down from 2.9% in March) and Brexit-related uncertainty remains high.
- The BoE’s updated macroeconomic projections are likely to be broadly unchanged. The BoE expected growth to rebound to 0.4% qoq in the second quarter of 2018 and it is likely to show increased confidence in its forecast. Further out, the boost from a lower yield curve (around 10bp lower at the 1Y and 3Y) will be offset by slightly weaker global growth.
- On inflation, we expect little change to the BoE’s near-term projection as the lower outturn (inflation held at 2.4% yoy in June, 0.1pp below the MPC’s forecast) is offset by conditioning on a higher oil price futures curve. The BoE is likely to project a slightly larger overshoot of the 2% inflation target at the 2-3Y horizon due to weaker sterling (the conditioning path for the effective sterling index has fallen 2.4% compared to three months ago).
- Recent comments by MPC members, including by dovish members, have been sanguine and highlighted the rebound in business surveys and consumer spending. In a recent speech, Governor Mark Carney said “the incoming data have given me greater confidence that the softness of UK activity in the first quarter was largely due to the weather, not the economic climate”. Financial markets are pricing in a 90% probability of a rate hike this week, and the MPC seems content with this.
- We expect no further hikes this year. Headline inflation is on a downward trend as the upward effect from past sterling depreciation continues to wane, while measures of domestically-generated inflation have eased recently. Risks to global growth are now skewed to the downside. And Brexit-related uncertainty remains high and is weighing increasingly on investment.
Technical analysis and trading signals:
- Legacy of July 19 hammer bullish candle still influencing price. Sterling is grinding higher through this week’s chop and eyes a close above the 14-day exponential moving average by 1.3139. In our opinion this opens the way to 1.3292 July 16 failure high. This-week BoE rate hike should help GBP/USD bulls. We think that current levels are good opportunity to open a long position.
GBPUSD Daily Forex Signals Chart
TRADING STRATEGIES SUMMARY: FOREX – MAJOR PAIRS:
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Source: GrowthAces.com – daily forex trading strategies