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BOE in Focus
The Bank of England meets today for its May rates decision and market expectations are split, creating plenty of room for volatility in GBP and UK assets. While a further .25% hike is well-baked in, market expectations over the likely tone of the bank’s forward guidance are split. Hawks argue that with inflation still elevated (holding above 10% last month), there is a pressing need for the bank to continue tightening in order to avoid inflation becoming entrenched at such high levels. However, doves argue that concerns over the health of the UK economy underscore the need for the BOE to pivot away form tightening.
Base Case Scenario
The BOE itself has said that there are concerns regarding the lag in recent monetary tightening feeding through into the economy. This caution suggests a desire to pause tightening. However, with inflation still so high, the bank needs to see clear signs that inflation is falling materially before it can do so. With this in mind, the base case scenario today is for the bank to hike by a further .25% while signalling that rates will likely need to move higher while inflation remains high. Focus will then shift to incoming inflation data as a guide for further BOE actions.
Challenge for Bulls
Given the run up we’ve seen in GBP this year there is room for a correction lower should the bank fall short of giving a solid hawkish signal in today’s forward guidance. Furthermore, any note of caution over the economy or any expressed preference for pausing tightening as soon as possible will fuel a sharper correction. As such, the bar for achieving a fresh move higher in GBP today is set quite high.
Technical Views
GBPUSD
The rally in GBPUSD has seen the market stalling into a test of the 1.2659 level following the breakout above the bull channel. Price is now retesting the broken channel resistance from above, which is holding as support for now. While above the 1.2437 level, the outlook remains bullish in favour of a further move higher towards 1.2992 longer term. Below 1.2437, however, 1.2270 comes into view as next support.
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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.