What:
At 12:00 GMT tomorrow, the Bank of England will announce the interest rate decision. The central bank will also release minutes to the monetary policy meeting, in addition to the quarterly inflation report.
The BoE is expected to keep rates on hold at 0.5%. Heading towards the meeting, traders had been optimistic that we could hear a slightly more hawkish sounding BoE Governor Mark Carney, following improved sentiment and stronger than forecast economic growth data in recent weeks.
However, political chaos in the Conservative party and uncertainties over Brexit, in addition to softer economic stats this week, mean we are likely to see the bank continue in a wait-and-see mood. With no change expected in interest rates, investors will focus on the inflation report and economic forecasts.
These will be the first updated forecasts released since the BoE raised rates in November last year. Since the rate hike, inflation has continued at 3%, which is considerably above the central bank’s 2% target. Average earnings are also starting to creep up which could start to increase inflationary pressure should the trend continue. Therefore, there is potential for the BoE to increase the inflation forecast.
However, even if the inflation forecast is increased, this unlikely to result in a more hawkish policy from the BoE with Brexit uncertainties clouding the picture.
How:
GBP/USD has fallen below $1.39 in early trading, as investors look ahead to Thursday. Pound traders will need more clarification from the BoE that an earlier rate rise is on the cards in order for the pound to move convincingly higher.
A unanimous vote by MPC members to keep rates on hold and only a marginal upgrade to economic and inflation forecasts could see the pound drift lower towards near term resistance at $1.3840 before falling to $1.38.
Alternatively, should BoE hawks Michael Saunders and Ian MacCafferty vote in favour of a rise, the pound could charge back towards the important psychological level of $1.40. Should the central bank present a more hawkish tone, then the stronger pound could weigh on the FTSE. Meanwhile, banking stocks, which flourish under higher interest rate conditions could be in demand.
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