Market Expectations Dovish Ahead Of The BOE

 | Apr 13, 2016 08:50AM ET

  • Bank of England Rate Decision
  • Thursday April 14th
  • 1200GMT1
  • Current rate 0.50%, expected unchanged
  • Current voting 9-0, expected unchanged
    • h2 Last Meeting/h2

    Market expectations were heavily Dovish ahead of the March BOE meeting and whilst the BOE statement was broadly Dovish, with the bank acknowledging the obvious downside risks, Sterling was actually seen trading higher in the wake of comments made by BOE Governor Mark Carney who stated that he still foresaw a rate-increase as more likely than not with a rate-increase needed to boost inflation back to target level.

    In terms of downside risks, alongside the now usual nod to the slow-down in emerging markets and ensuing market volatility, the BOE also acknowledged the damage contributed by Brexit-driven investor uncertainty which was likely to hamper economic growth and investment and was also a likely cause cause of the recent declines in Sterling.

    Regarding inflation, the bank noted their view that inflation was expected to remain low over the remainder of 2016, expected to average just 0.8%, and the bank would remain “watchful” for evidence that low inflation is having a more persistent effect.

    h2 Data & Developments/h2

    Whilst the March BOE failed to provide a clear catalyst for further downside, Sterling has generally been weaker, weighed upon heavily by Brexit-driven investor uncertainty and a raft of weak domestic economic data.

    On the data front, we have generally seen weakness from the UK economy, headlined by the severe slowdown in the UK manufacturing sector, alongside a few positives, notably the unexpected pickup in March inflation and 4Q 2015 GDP

    Positive data

    • February Retail Sales were stronger than expected
    • 2015 4Q GDP better than expected
    • March Construction & Services PMI’s both better than expected
    • March CPI was better than expected with Core inflation jumping the most since October 2014,

    Negative data

    • February CPI printed below expectations on headline and core
    • February Public Sector Net Borrowing increased
    • March manufacturing PMI below expectations (though slightly up from Feb)
    • March Manufacturing Production fell the most since August 2013 and Industrial Production the most since February 2013
    • Total Trade Balance deficit widened in February
    h2 Expectations For This Meeting/h2

    With Brexit uncertainty continuing to put pressure on the UK economy, and key data points still failing to show positive signs, it’s likely that the message the BOE delivers tomorrow will be pretty similar to the last one. The one key difference this time around is the sharp pickup in Core inflation over March which could see a dialling back of the Dovish language as the BOE once again looks ahead to a time when a rate increase will be warranted. Also important to keep an eye out for any further language relating to the Brexit debacle following on from the bank’s message last time around. Ultimately, with the release of the Quarterly inflation report next month , not expecting to receive much new information tomorrow but certainly will be keeping a close eye on language relating to inflation to see how the BOE uses this latest data.

    h2 Trade Idea/h2
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    Depending on how price develops between now and the meeting there are a few opportunities we could look to take advantage of on the back of any volatility seen tomorrow.

    GBP/AUD has been moving in sustained bearish trend since last summer’s highs. Price is currently teetering on the edge of breaking down through the current support level at 1.8484. In line with the moves we’ve seen through the last two key support breaks I will be looking to play a breakdown in the pair targeting a move into 1.83 initially.