Bank of England Preview: Central bank to bide it's time?

The BoE is due to make its monetary policy announcement on Thursday at 12 midday BST. With covid cases clouding the outlook and the furlough scheme set to conclude in the Autumn, the central bank is likely to bide it's time. However, the inflation outlook could be upwardly revised which could add pressure to the BoE. It would take a hawkish shift from the BoE to boost GBP/USD back over 1.40.

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When is the BoE interest rate decision? 

The BoE interest rate decision takes place on Thursday 5th August at 12:00 midday BST. 

What to expect from the Bank of England? 

The BoE is widely expected to keep monetary policy unchanged with interest rates on hold at the record low 0.1% and its bond purchase programme steady at £875 billion to the year end.  

Data so far 

Data over the past 6 weeks showed the that the economic recovery continues to make progress. However more recent figures have hinted towards a stagnation of growth. Retail sales and consumer inflation were softer than forecast in June and PMI data is showing a deceleration in activity growth most likely owing to rising covid cases. The mixed data suggests that it is too early for the BoE to talk tapering support. 

Tightening policy 

That said, policy maker Michael Sanders has already sent a strong signal that he is inclined to vote for an early end to QE. Deputy governor Sir Dave Ramsden has also taken a more hawkish tone recently. But other committee members such as Jan Vlieghe and Jonathan Haskel think it is still too early to taper QE instead preferring to leave the asset purchase programme to run to the end of the year. The vote on this will be watched carefully, more dissenters could lift the pound. 

No hints on rate rise 

Given the rise in Delta covid cases which has clouded the near-term outlook of the economy, the BoE is unlikely to offer any hints or clues over when the first interest rate hike may come. A hawkish shift at this meeting is looking unlikely but the bank could attempt to strike a more optimistic tone when it unveils its quarterly forecasts. 

Quarterly forecasts  

The BoE could raise its inflation forecast. The NIESR think tank sees inflation rising to 3.9% early next year. The BoE could follow suit upwardly revising inflation forecasts from 2.5% in May to closer to 4%. The rise in inflation could add some pressure to the BoE to explain how it will approach tapering. 

Unemployment could fare better than initially feared, a peak of 5.8% had previously been priced in. However, with government’s furlough scheme concluding in the Autumn the BoE will want to see how the labour market holds up. 

Bide it's time 

There are two main reasons that the BoE will want to hold steady and bide its time. Firstly, to see how the latest wave of covid pans out and secondly to see how the end of the furlough scheme impacts the labour market. 

How the BoE could move GBP/USD -Where next for GBP/USD? 

GBP/USD has recently broken above its two month descending channel. However, the pair failed to retake resistance at 1.40. It currently trades above the upper band of the channel but below the 50 dma. The RSI is supportive pf further upside.  

A hawkish tilt from the BoE could see GBP/USD retake 1.40 in order to push towards 1.4130 June 16 high and 1.42 round number. 

On the flipside, a dovish sounding BoE could see GBP/USD move back below 1.3875 and into the descending channel, bringing the 200 dma at 1.3750 info focus.

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