Lukman Otunuga
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Bank of England

Suspense is elevated with policymakers squaring up over asset purchases and potential signals over ending the bank’s QE programme.

Upbeat new forecasts

Super Thursday means we get new economic projections from the Old Lady. The spread of the Delta variant may see a downgrade of third quarter forecasts though the bank is expected to signal that the economy remains on track to reach pre-pandemic levels by year-end.

Inflation forecasts will probably be shifted higher in line with re-opening price spikes with a peak of 3.5% in the near-term. The bank believe that higher inflation is temporary even as inflation expectations have drifted above 3% one year out. CPI projections are forecast to show that inflation is set to fall back to target by 2023/24.

Any discussions around balance sheet reduction will cause the market to perk up. The previous 1.5% Bank rate threshold for kicking this process off will be lowered at some point, so any more colour here will see market volatility.

Vote in focus

More broadly, consensus sees a low probability that the MPC turn more hawkish at this meeting. The majority of analysts do not expect hints at an earlier hike and no more than two votes for an earlier end to QE, which is set to be completed in December.

Ramsden and Saunders are the two hawkish outliers at present, taking over the mantle from the recently departed Haldane. The forecast 6-2 vote remains a key variable for markets with risks fairly asymmetric on this outcome. There is probably a risk that part of the market has priced in more than two votes who think purchases should be curtailed. But the lack of a hawkish signal like this would potentially see some GBP weakness and the repricing of interest rate expectations.

Potential for GBP Short covering

If the MPC do look beyond the current Delta variant uncertainty with a split vote and see that significant progress is closer than many think, GBP bulls will push for more gains. The covering in short GBP/USD positions should then push cable up to 1.3950 and into the 1.40 resistance level with 1.4110 a target above here.

That said, the ending of the 1.9 million workers on furlough in September is perhaps a key marker for policymakers giving them more clarity in their decision making. Consolidation above the 200-day moving average at 1.3750 is crucial for further upside.

Written on 05/08/2021 by Lukman Otunuga, Senior Research Analyst at FXTM

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