BoE preview: Will the BoE push back to February?

When will the BoE announce its interest rate decision?

The BoE is due to release its interest rate decision at 12:00 on Thursday 16^th December.

November meeting recap

The BoE caught the markets off guard in November and voted 7-2 to keep interest rates unchanged at 0.1%. Policy makers said that they wanted to see how the jobs market would cope with the winding down of the furlough scheme before hiking rates.

Since then, the latest data revealed that the labour market remained strong in November with 275,000 payrolls added, whilst unemployment ticked lower to 4.2%. The number of people claiming unemployment benefit also fell by almost 50,000. All in all, the furlough scheme ending has had little effect on the labour market.

And then Omicron arrived.

What to expect?

Since Omicron came onto the scene and Boris Johnson announced Plan-B, investors have pushed back on expectations of a rate hike by the BoE. The broad expectation is that the central bank will hold off until February, or perhaps even later before firing the starting gun on raising rate, allowing time for the bank to see how Omicron develops, what actions the government takes and how they impact the economy.

But at the same time the BoE can’t ignore the warning signs that inflation is flashing. UK CPI jumped to 4.2% YoY in October, the highest level in over a decade, up from 3.1% in September and well above the BoE’s target 2%. The BoE expects inflation to peak at 5% in spring next year before easing lower back towards 2% in 2023.

Normally, strong labour market data and decade high inflation would be sufficient to guarantee a rate rise. But Omicron has thrown a spanner in the works. The broad market expectation is that the BoE will kick the can down the road. However, the central BoE could just focus on the data and hike rates – given that this is not expected,  it could create the bigger movement into the pound.

It is also worth keeping in mind that the Fed is expected to tapper at a faster pace and the ECB stay pat. Therefore inaction by the BoE could see bigger moves in GBP/USD, meanwhile a rate hike by the BoE could see bigger moves in EUR/GBP. 

Where next for GBP/USD?

GBP/USD broke below its falling trendline support at the start of the month finding a floor at 1.3160 the year to date low.

The rebound from the 2021 low has so far failed to move above the 5 week falling resistance and the weekly high of 1.3277. A move above here exposes the falling trendline support turned resistance.

Beyond here 1.3370 the late November high could offer resistance, but a move above this level could see buyers gain traction.

Meanwhile any dovish hints from the BoE could see the pound test the yearly low at 1.3160, opening the door to 1.31. The RSI is supportive of further downside.

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