BOE In Focus
The December Bank of England meeting is fast approaching and, on the back of a string of bumper UK data releases recently, the market is widely expecting the BOE to lift rates. Indeed, the market was broadly expecting a rate hike in November, in line with the guidance and signalling given by the BOE in the run up to the meeting. Soaring inflation over Q3 and improving labour market figures were accompanied by hawkish BOE member commentary, suggesting that November hike was all but certain. However, in the end it seemed that the BOE opted to wait and see how the inflationary dip in October played out as well as the impact of the end of the government’s furlough support program.
Inflation Situation
However, the slight drop in inflation over September, from 3.2% to 3.1% (still much above the BOE’s 2% target) proved short-lived with inflation surging to 4.2% in October. Additionally, employment indicators were seen improving again with the unemployment rate falling back to 4.3%, its lowest level since late 2017. In light of this recent data, there has been a sharp upward move in pricing for a December rate hike. With price pressure storming ahead and the energy crisis showing no signs of abating, the market is looking for the BOE to take action and help quell the current surge in costs for consumers.
Bailey Warns Of Two-Way Risks
Over the weekend, however, comments from BOE governor Bailey suggest that a rate hike in December is far from a done deal. Bailey acknowledged that if economic data continues to strengthen, the BOE will be forced to act. However, he didn’t say when this would be. Bailey also added the caveat that the current economic situation in the UK is “febrile” and noted that inflation risks are two sided.
Supply-Side Issues
Making his case against immediate rate hikes, Bailey argued that, given the majority of the price pressures are related to the supply side, a shift in monetary policy is not going to change things, saying that a rate hike “doesn’t get more gas, more computer chips, more lorry drivers”. However, Powell did concede that the BOE has under-estimated inflation this year and the risk now Is that If inflation moves into second round effects, it will become more entrenched and remain higher for longer.
Despite Bailey essentially playing devil’s advocate here, the market is still widely expecting the BOE to lift rates in December. The key to gauging this likelihood will be in monitoring incoming data. However, with inflation so elevated here and labour market data so strong, it would take some heavy misses to derail expectations for a December hike.
Technical Views
EURGBP
The sell-off in EURGBP has seen the market breaking down through several key levels. Price is currently holding at a test of the bear channel support, sitting just below the .8429 level. With both MACD and RSI in the red, there focus is on a continuation lower towards the .8336 level, while price holds below .8429.
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With 10 years of experience as a private trader and professional market analyst under his belt, James has carved out an impressive industry reputation. Able to both dissect and explain the key fundamental developments in the market, he communicates their importance and relevance in a succinct and straight forward manner.