The Bank of England’s Super Thursday is finally here and the pound is, well, not really that excited at the time of this writing. If analysts have read Governor Mark Carney and his Monetary Policy Committee colleagues’ signals correctly, we should see an interest rate rise at this meeting. Given the pound’s recent strength it makes sense if those who bought on the back of the rumors are taking some off the table, fearing the move may be priced in. Profit-taking is therefore at least partially responsible for the pound’s slight weakness ahead of the BoE’s decision. But sterling may bounce back just ahead of the announcement on opportunistic buying, before potentially surging higher if the BoE does raise interest rates and sound more hawkish than the market currently expects.
The negative impact of Brexit on sterling has raised borrowing costs, causing inflation to rise across the board. With the CPI climbing to 3.0%, the BoE cannot risk overcooking inflation. So, the Official Bank Rate is likely to rise from its current record low level of 0.25% by 25 basis points to 0.50% while no change is expected to be announced as far as the Asset Purchase Facility is concerned. This would be the first rate rise since July 2007 – a historic moment. While many think this may be a “one and done” rate increase, it could be that inflation may rise further in the coming months, say as a result of higher oil prices. Consequently, the Bank may have to tighten its belt further and do so more quickly than the market expects. If this fear is shared by the MPC and conveyed in the Inflation Report, then don’t be surprised to see a massive bullish response from the pound later this afternoon. Alternatively, if the BoE continues to expect that inflation will ease back quickly then that could undermine sterling. The biggest surprise would be if the MPC decides against raising interest rates at this meeting. That would be a shocking outcome, but a possibility nonetheless.
If we are to see a bullish response from the pound then it would make sense to pair it against a weaker rival such as the Japanese yen or Swiss franc. Alternatively, sterling bears may get a better reaction in the event the currency slumps by pairing it against a stronger rival, such as the US dollar.