Missed out on all the happenings this Super Thursday? Don’t fret! I’ve summarized the takeaways from the BOE policy decision, Inflation Report hearings, and MPC meeting minutes so y’all can figure what what these mean for the pound’s forex price action.
Spoiler alert: Super Thursday was as “super” as the Fantastic Four reboot. And by “super”, I mean super disappointing.
1. Central bank is in no rush to tighten
Contrary to what BOE Governor Mark Carney led most forex junkies to believe after last month’s Inflation Report hearings, the U.K. central bank isn’t quite ready to don its hawkish feathers just yet. He may have mentioned a little something about moving closer to hiking interest rates, but it turns out his fellow policymakers aren’t exactly in the same boat.
As indicated in the August Inflation Report, majority of the monetary policy committee members believed that there is still a bit of economic slack left to warrant a longer period of low interest rates. Although BOE officials expect the pickup in domestic demand to reduce spare capacity in the near-term, they also noted that there were risks to global growth stemming from the euro zone and China.
Even Carney’s testimony was a bit more balanced this time around, as he pointed out that the exact timing of the BOE’s first interest rate hike would be tricky to predict since it would be data-dependent. Somebody’s taking a page from Fed head Yellen’s book!
2. Lone wolf McCafferty voted to hike interest rates
Several forex analysts had also been expecting the Dissenting Duo (Ian McCafferty and Martin Weale) to be joined by another hawk (David Miles) to form what I’d like to call the Tightening Trio in voting for a rate hike. Much to their dismay, the latest MPC meeting minutes revealed that McCafferty was sitting in the hawkish camp all by himself this time.
While the BOE minutes acknowledged that inflationary pressures are supported by strong domestic demand and rising wages, it was only McCafferty who thought that these factors were enough to call for a 0.25% rate hike. Nonetheless, this dissenting vote still marked the first split in the BOE votes so far this year, as MPC members had previously been voting unanimously to keep rates and asset purchases unchanged.
3. BOE officials revised their economic forecasts
U.K. central bank officials seem pretty giddy about growth prospects, as they revised their 2015 GDP estimate from 2.5% to 2.8%. They cited a potentially stronger 4.75% increase in business investment, up from the earlier 2.5% estimate, and a 3% rise in average pay, also upgraded from the initial 2.5% forecast.
On the flip side, BOE officials downgraded their estimates for employment and inflation. After factoring in the recent declines in commodity prices, policymakers concluded that the annual CPI could come in at 0.3% this year, down from their earlier projection of 0.6% inflation. They also added that falling energy prices could continue to weigh on consumer price levels until mid-2016.
4. Carney is worried about pound appreciation
Aside from concerns about another commodity price downturn, the pound’s recent forex rallies have also convinced BOE officials to be extra cautious for the time being. After all, GBP/USD is up by around a thousand pips from its lows around 1.4600 in April this year, and further gains could wind up weighing on domestic price levels.
In particular, the Inflation Report indicated that the British currency has appreciated by 3.5% since May and by 20% since its low point in March 2013, explaining that the “drag on import prices from this appreciation will continue to push down on inflation for some time to come.”
5. Pound bulls are very disappointed
At the end of the day, Super Thursday turned out to be a party-pooper for the pound bulls who had been expecting more confirmation that the BOE could catch up to the Fed in the rate hike race. Heck, Cable dropped by around 150 pips right after the reports were released!
Of course this selloff was partly spurred by profit-taking off long pound positions by forex traders who pushed their rate hike expectations much later into 2016. I guess you could say that this doesn’t necessarily reflect a shift to a long-term bearish bias for the pound but rather a knee-jerk reaction to the disappointing news that the BOE wasn’t as hawkish as many expected. Come to think of it, the BOE is still on track to tighten monetary policy at some point, unlike some of its central bank peers that are maintaining an easing bias, and the U.K. economy is doing mighty fine compared to most of the major economies.