Bank of England Going Nowhere

Volatility risks lie squarely with sterling today, with both the monetary policy decision (together with meeting minutes) falling at 11:00 GMT, with the BoE Inflation Report published soon after. The real interest is going to be with the Inflation Report, where we are going to see a lot of questions regarding the impact of Brexit on the Inflation Outlook. We’re unlikely to see major changes to the inflation outlook over the forecast horizon. On one side, if we look at market based measures of expectations, these have risen modestly since the last Report published in February. Furthermore, interest rate expectations (on Bank of England’s method) will have likely softened on over the past 3 months. On the other side of the equation, we’ve seen some weaker activity data over past few months, which could offset. Morgan Stanley’s measure for the length of time for the first hike currently stands at 40 months, which remains far longer than most economist and other pundits are looking at. With the first hike priced so far head, it’s hard to see sterling getting that excited about the Inflation Report. The risks lie mainly with any indication or talk of easier policy, given the backdrop that we see of easier elsewhere (Japan, ECB, RBA and potentially the RBNZ and BoC).

Elsewhere, the Brazilian Real continues to pin hopes on the imminent impeachment of President Rousseff, with this seen paving the way for an improved outlook for the economy and finances. Most EM currencies have fallen so far this month and the Real’s performance has stood for most of the year. The question is whether this can continue once the euphoria settles from the current political theatre. From many angles, this looks unlikely.

Did you know?

The GBP/USD pair is widely referred to as “cable”. The term dates back to the 19th century, during which the exchange rate between the U.S. dollar and the British Pound was transmitted across the Atlantic via a huge cable that ran across the ocean floor and connected the two countries.

Word of the day
"Fibonacci Retracements" - Support and resistance lines drawn on an asset’s price chart to determine any Fibonacci relationships in the price fluctuations. They are named after Leonardo Fibonacci, the 13th century mathematician, who introduced the Fibonacci numbers as an integer sequence in which each number is the sum of the previous two.
Pro Tip

Leverage is a double-edged sword. Understand it before you use it.

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