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Pound Pivoting – BOE Preview

Market Analysis

GBPUSD, H4

Reuters have just reported their February Global foreign exchange poll and “Sterling’s big rise this year – including its strongest monthly rally since 2009 in January – is over, and concerns over Brexit will start weighing the currency down again.

The pound is down around 10.5 percent on a trade-weighted basis since the June 2016 referendum when Britain voted to leave the European Union. But it is up about 6.5 percent from the low point it reached in October 2016. Compared with equity markets, currencies have remained relatively calm in the last few days. Although sterling fell for the fourth straight day on Wednesday, it was still trading around $1.39. Only one strategist polled last month had anything higher than $1.38 for their one-month forecast.

But as in other recent monthly Reuters polls, the pound GBP is expected to move little over the forecast horizon. It will trade at $1.40 in a month, $1.39 in six months and back at $1.40 in a year, according to the median view from more than 60 foreign exchange specialists polled in the past week.”

The rapid appreciation for Cable in particular, during January needed to cool. So what of Super Thursday ?

  • No Rate Change expected
  • A hike at the May meeting – a possibility, currently less than 50% – this is the key event of the day for the markets
  • Outlook – could turn more hawkish
  • Inflation – currently over shooting but expected to cool during 2018 – but as Oil prices rise – will this continue ? – Q4 growth was better than expected and their may even be signs of wages finally ticking up – a survey this morning from The Recruitment and Employment Confederation said businesses were hiring staff at the joint-fastest rate since April 2015, and running into skills shortages. British companies are raising the salaries they offer to new permanent staff at the fastest rate since June 2015 due to a shortage of good-quality staff. Additionally, there will be the letter that Governor Carney has had to write to the UK Chancellor explaining why CPI inflation continues to over shoot the Bank’s 2% target.
  • Brexit – remains the great uncertainty swirling around the UK economy and Sterling in particular. The “soft brexit” expectations from the December meeting was in part the reason for Sterling’s rally, however, the BoE and Carney, in particular need to tread carefully on any further Brexit pronouncements. They will remain on the fence until the details of a transitional deal are agreed.  The subject underpins everything.
  •  GBPUSD pivots at 1.3900 this morning, having weakened in the last week ahead of the meeting. The key 1.3850 level (the 61.8% Fibonacci retracement  level ) from the pre-brexit high was touched again on Tuesday and should provide support, next level would be 1.3745. To the upside there is 1.3950 and the much heralded psychological level of 1.4000-30 zone and then the January highs around 1.4350.   

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Stuart Cowell

Senior Market Analyst

HotForex

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