What To Look For Ahead Of BOE

Last month’s Bank Of England meeting delivered more of a hawkish message than markets were expecting. Given the mounting concerns over China and the global growth outlook, with disinflationary pressures weighing, markets were poised to receive a more downbeat assessment of the economy and less optimism over the UK’s advance towards a rate hike.

However, the BOE’s message was unexpectedly encouraging, downplaying the risks from China and optimistic over over the path of inflation, with concern registered by some members that inflation might actually rise faster than expected. Voting remained unchanged at 8-1 in favour of holding rates unchanged.

The market reaction to this message saw firm GBP buying, with GBP/USD trading back up to mid 1.56 from 1.51 lows a week prior to the meeting.

Following the initial GBP strength on the back of that meeting, GBP has since weakened across the board. Data since the last meeting has been fairly mixed, though some strong positives have been noted.

• CPI managed to cling to 0% and avoid dropping back into deflation, though down from 0.1% previous.
• Mortgage approvals increased to 71k from 69k previous, marking an 18 month high.
• Net lending jumped to £3.4b from £2.8b previous marking a five high.
• Average weekly earnings rose 2.9%, the fastest pace for six years
• Unemployment dropped to 5.5%, surpassing analyst expectations

Peppered in amongst this series of highly encouraging data we have, however, seen public sector net borrowing jump to a worrying £11.3b from £-0.1b previous and more recently, September services PMI data dropping to 53.3 from 56.6 previous.

The BOE’s financial stability report stated that although risks from the Eurozone and Greek situation had diminished, downside risks from the China slow-down had in fact increased, adding further colour since the September BOE.

Outside of domestic datam we also saw the US September jobs report striking a fourth consecutive low of 142lk vs 173k previous, with the previous also revised down to 138k. Following this poor data release, markets began to price out a 2015 rate-hike, with March 2016 now becoming the focal point for a potential rate rise.

Oil prices, which have placed significant downside pressure on inflation as they sharply deteriorated from last year’s highs, have since formed an interim base and risen from around $43 per barrel at the last BOE meeting back toward $50, breaking up through the descending trend line resistance from last year’s highs, which will no doubt be viewed with relief by Central Bankers.

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Concerns around China have stabilised for the time-being, with data weakness having diminished and talk surrounding potential Chinese stimulus helping to stave off further downside pressure, allowing a rebound in commodity prices and risk sentiment.

This month’s BOE should largely pass in a similar fashion to September’s meeting, with voting remaining unchanged and some positive commentary alongside acknowledgement of risks to the Bank’s inflationary outlook.

Points To Look Out For

• References to inflationary outlook. The Bank could highlight the likelihood of inflation picking up sharply into the year end if oil prices sustain a fuller rebound.
• References to China. How does the Bank regard China risks now?
• References to US lift-off. Does the Bank regard the recent weakening in US lift-off expectations in its assessment?
• References to domestic data. How does the Bank regard current economic conditions?

Investor expectations around the likelihood of a BOE rate-increase in the near term have waned following the pushing-out of expectations for a US lift-off, with the general consensus leaning towards the idea that the BOE will be following the Fed, and so if the Fed are less likely to move, so too are the BOE. This perhaps presents an under-pricing of a UK lift off. In its last meeting, the BOE sounded much more positive about the health of the UK economy and path towards policy adjustment than the Fed did about their own.

Strong wage growth and resilient inflation are encouraging for the BOE, as is the recent stabilisation in China and the potential for further energy and commodity prices rebounds. If the BOE follows a more optimistic tone, delivering another encouraging message will see further GBP buying.

If, on the other hand, the Central Bank strikes a more downbeat tone amidst the weakening of US lift-off expectations and certain data weakness, emphasising China risks, expect GBP to unwind.

• Hawkish BOE – If the BOE do come in with an upbeat delivery tomorrow, then I would look at trading a breakout in GBP/USD with bullish Order Flow and price crossing above VWAP.
• Buy above 1.5350s area for a move that should target the 1.55 area, where we have descending trend line resistance, which could cap price near term as cable looks to be forming a descending wedge pattern as this range persists.

• Dovish BOE – If the BOE strike a more dovish tone, sounding less upbeat about economic developments since the last meeting, then I would look to trade a continuation lower in GBP/NZD.
• GBP/NZD is currently respecting a very clean bearish channel and has been continuing lower from retracements into broken former supports against the bearish channel resistance, with VWAP acting as resistance and Order Flow confirming with bearish sell signals. Look to sell a similar move if it occurs into a test of the 2.33 area, or otherwise, play a break down lower through current lows on a break of 2.30