BoE Governor

On Tuesday, the demand for the pound was significantly higher than that for the euro. As soon as this happened, many analysts began to pay attention to the report on prices in UK stores, as shop price inflation accelerated to 9% this month. This indicates that UK inflation is decreasing slowly or not decreasing at all, despite the benchmark interest rate being raised to 4.5%.   The consensus forecast for the Bank of England's rate currently suggests two more quarter point rate hikes in June and August.   This would bring the rate to 5%. Any further tightening without alternatives would push the British economy into a recession, and even the current rate could potentially cause it, despite the BoE's optimistic forecasts. But how can inflation be combated if it hardly responds to the actions of the central bank?     I believe there can only be one disheartening answer: it cannot. If further rate hikes lead to a recession, the Brits, clearly dissatisfied with recent events within the country, may start a new wave of mass strikes. Take note that in the past year, many Brits have openly criticized the British government for the sharp decline in real incomes and high inflation.   If the rate increases further, the economy will contract, leading to an increase in unemployment. If the rate is kept as it is, it might take years for inflation to return to the target level. The BoE is in a deadlock. BoE Governor Andrew Bailey expects inflation to start decreasing rapidly from April. He noted the decline in energy prices, which will somewhat dampen inflationary pressure on all categories of goods and services. However, the April inflation report was unusually contradictory. While headline inflation showed a significant slowdown, core inflation continues to rise.   Therefore, it is not possible to conclude that inflation is slowing down in the general sense. We can only wait and observe. If Bailey turns out to be right, then the BoE will not need to raise the rate to 5.5% or 6%, which currently seems like a fantasy.   However, if inflation continues to hover around 10%, the BoE will need to devise new measures to address it without exerting serious pressure on the economy. It might require patience for several years. It is entirely unclear which option the central bank will choose.   The demand for the British pound may increase as market expectations of a hawkish stance grow. But will these expectations be justified? The pound may rise based on this, but fall even harder when it becomes clear that the BoE is not ready to raise the rate above 5%. I believe that wave analysis should be the primary tool for forecasting at the moment.     Based on the analysis conducted, I conclude that the uptrend phase has ended. Therefore, I would recommend selling at this point, as the instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic.   A corrective wave may start from the 1.0678 level, so you can consider short positions if the pair surpasses this level. The wave pattern of the GBP/USD pair has long indicated the formation of a new downtrend wave. Wave b could be very deep, as all waves have recently been equal.   A successful attempt to break through 1.2445, which equates to 100.0% Fibonacci, indicates that the market is ready to sell. I recommend selling the pound with targets around 23 and 22 figures. But most likely, the decline will be stronger.    

The problem for rates markets is that, much like the leading/lagging indicators dichotomy, there are two ways to look at today’s report. With base effects and energy pulling the headline annual number back very close to 3% (if consensus is to be trusted), investors are likely to be showered with headlines of the ‘inflation is back to its lowest level since early 2021’ kind.   The reality is more nuanced. A 0.3% monthly rate on both the headline and core readings is consistent with 3.6% annual inflation. Progress, but celebration is premature when the source of inflation is now moving to much less mean-reverting components, and last month’s job report suggests wages are not letting up either.   If the BoE hikes by another 50bp in August, there is room for curve inversion   Higher for longer vs panic hikes There are two ways to deal with stubbornly high inflation and an economy that, so far at least, doesn’t seem that bothered by the amount of policy tightening delivered in this cycle. One is the Fed’s. In short, signalling that the peak is near but that rate cuts are still a long way away. This isn’t an easy message to deliver, but the Fed has had some success. The curve still prices 125bp of easing in 2024, and the Fed’s ‘dot plot’ signals 100bp. If the strategy is to signal ‘higher for longer’ rates, this may well be the next target for the Fed.   Contrast that with the BoE’s 50bp hike last month. It’s an open question whether this hike will be repeated in August. Next week’s inflation print, especially the services component, is widely seen as the final piece of the jigsaw. A repeat would speak to a different strategy to the Fed’s, whereby rates are raised to however high is necessary in order not to lose credibility. With policy rates already at 5%, confidence that rates will eventually drag on the economy is growing. To us, this points to differing curve dynamics, where the US short-end curve may well re-steepen to reflect steady policy rates for a longer period of time, while the UK curve should invert further.     Today's events and market view Ahead of a busy Northern American calendar, this morning’s list of European events is rather thin. Spain’s CPI reading will be a final release, and BoE Governor Andrew Bailey’s speech should be focused on financial stability, and so less likely to comment on recent data. Bond supply today will come from the UK, US, and Germany selling 10Y debt, and Portugal selling bonds with 2029 and 2035 maturity. The main dish on today’s economic menu will be the US CPI report where the core and headline readings are still expected to grow at a 0.3% monthly pace, which annualises to 3.6%. The annual headline figure converging to 3% for the first time since March 2021 may be what headlines focus on, however. The Bank of Canada’s (BoC) decision to restart its hiking cycle in June after a five-month hiatus is largely expected to be followed by another 25bp hike. Any indicator on the pace of future hikes will likely be parsed by investors in other currencies, seeing the BoC as a bellwether for other developed market central banks.

Recent macroeconomic readings, including data on wages, GDP, and industrial production, have provided valuable insights into the current state of the British economy. These key indicators offer crucial information about the depth of the potential recession and the future course of action for the Bank of England (BoE). To shed light on these important developments, we reached out to Nick Cawley, Senior Strategist at DailyFX, for his expert analysis.   The persistent challenge faced by the BoE is the backdrop of persistently high inflation, which currently stands at 8.7%, well above the central bank's target of 2%. Simultaneously, the UK's economic growth remains lackluster, prompting the BoE to carefully assess the delicate balance between raising the borrowing rate to control inflation and avoiding a recession.     FXMAG.COM: What do this week's macroeconomic readings - wages, GDP, industrial production - tell us about the state of the British economy? Will the recession be deep? Will the BoE continue to raise rates?    Nick Cawley, Senior Strategist at DailyFX said: This week's economic data continue to highlight the problems that the Bank of England (BoE) face. Against a backdrop of relentlessly high inflation -  8.7% against the central bank's 2% target – and tepid UK growth, the BoE will need to gauge how much further they can lift the borrowing rate without sparking a recession.   The UK labor market remains robust, although cooling, with wage growth near record levels last seen during the pandemic period. This week's data show the UK unemployment rate rising to 4% in April, from a prior month's 3.8%, a small positive for the BoE in its fight against inflation, but soaring wage growth will likely keep pressure on consumer prices.    The latest Office for National Statistics (ONS) data show UK GDP flatlining in the three months to May, and indeed UK growth has been fairly stagnant since the start of 2022, not helped in part by rising borrowing. While the UK has avoided a technical recession so far, the likelihood that UK GDP may turn negative in the coming months is growing.   Recent inflation and jobs data all but guarantee that the UK central bank will hike the Bank Rate by a further 50 basis points to 5.50% at the next monetary policy meeting on August 3rd. The question then is what happens at the next meeting in the economic calendar on September 21. Will inflation fall sharply, as suggested on many occasions by BoE governor Andrew Bailey, or will data show the accumulative effects of prior rate hikes is taking effect? Add into the mixture UK mortgage costs are hitting multi-year highs and the BoE have a testing few months ahead. 

In order to understand how the Bank of England is going to act at the remaining two meetings in 2023, we need to consider its potential for raising interest rates. The first and most crucial indicator that the central bank (and the markets) has been relying on for some time is inflation. However, as of September, inflation remains extremely high, well above the target level. One might assume that the BoE will continue to hike rates, but in September, it took a pause. A pause can only mean two things: either the BoE is preparing to end the tightening process, or it has already completed it     BoE Governor Andrew Bailey and some other members of the BoE's Monetary Policy Committee have mentioned that they expect inflation to drop to 5% by the end of the year. A 5% inflation rate is still very high, 2.5 times above the target. If the BoE is already prepared to conclude its tightening, it may not achieve the target. Furthermore, there's no guarantee that inflation won't start accelerating again.   For instance, US inflation has been rising for the past two months. All I want to convey with these arguments is that it's still too early to assume that inflation can return to 2% at the current interest rate level. Based on that, I believe that the BoE has exhausted its potential for rate hikes, and this is the main reason for the pause in September. Now, the central bank will only raise rates if inflation starts to accelerate significantly. And in that case, the 2% target may be forgotten for several years even with a peak rate, but we could still see 1-2 more emergency rate hikes. I also want to note that the BoE (like the European Central Bank) is counting on holding rates at the peak level for an extended period to bring inflation back to 2%. This was mentioned after last week's meeting.   The Monetary Policy Committee expects inflation to slow down further, but Bailey says cutting rates would be "very premature". Four out of nine committee members voted for a rate hike at the previous meeting. In addition, the Monetary Policy Committee said its balance sheet of government debt will shrink by £100 billion. Based on the analysis conducted, I came to the conclusion that a downward wave pattern is being formed.   I still believe that targets in the 1.0500-1.0600 range for the downtrend are quite feasible, especially since they are quite near. Therefore, I will continue to sell the instrument. Since the downward wave did not end near the 1.0637 level, we can expect the pair to fall to the 1.05 level and slightly below. However, the second corrective wave will start sooner or later.     The wave pattern of the GBP/USD instrument suggests a decline within the downtrend. At most, the British pound can expect the formation of wave 2 or b in the near future. However, even with a corrective wave, there are still significant challenges. At this time, I would remain cautious about selling, as there may be a corrective upward wave forming in the near future, but for now we have not seen any signals for this wave yet.