On Thursday at 11:00 am GMT the Bank of England (BOE) will publish its monetary policy decision for the month of August. What’s more, it’s “Super Thursday” season for the BOE!
If you’re a newbie forex trader, lemme tell you that “Super Thursday” refers to the quarterly simultaneous release of the BOE monetary policy statement, Monetary Policy Committee (MPC) meeting minutes, and the Inflation Report. That’s a trifecta of major catalysts for the pound’s forex moves!
Why are these reports important?
Aside from the BOE policy decision, the release of the MPC meeting minutes could also push pound pairs around because this would reveal whether committee members are leaning more towards the dovish or hawkish side.
The icing on the cake and what makes this Super Thursday super is the BOE Inflation Report, which contains more deets on the central bank’s growth and inflation outlook and provides clues on what policymakers are planning next.
Downgraded forecasts could indicate that monetary stimulus might stay in place for much longer while upgraded estimates could suggest that the central bank is gearing up to tighten soon.
What happened last time?
The BOE didn’t make policy announcements in July, but June’s decision was eventful enough. The MPC kept its policies unchanged as expected, but market players were surprised that there were not one, but THREE members who voted for a rate hike.Adding to the frenzy was the fact that policymakers are now getting uncomfortable with high inflation. Remember that MPC members have been putting off a rate hike because it was more important for them to stimulate growth and employment than achieve their inflation targets on time.
But with inflation overshooting even their generous estimates and additional employment sapping up the economy’s spare capacity, the bank now has less incentive to keep policies accommodative.
Near the end of its statement the MPC noted that the inflation overshoot could be “more pronounced than previously thought” and that “withdrawal of part of the stimulus…would help to moderate the inflation overshoot while leaving monetary policy very supportive.”
Not surprisingly, the unexpected hawkish votes, along with the MPC’s discussions over higher inflation and lower spare capacity attracted pound bulls across the board.
What’s expected of the BOE this time?
Market players aren’t expecting any policy changes this month. However, a string of weak economic data and a slump in consumer confidence are expected to pull down the BOE’s growth forecasts.
Analysts also seem to expect the BOE to raise its inflation estimates even though the pound has recovered half of its Brexit-day losses and June’s CPI had calmed down to 2.6% from May’s 2.9% (though it’s still above the BOE’s 2.0% target).
Traders will also be looking closely at the policy biases of Mark Carney and his team. Kristin Forbes, one of June’s three rate hike-teers, is out and Silvana Tenreyro (who has yet to share her biases) is in. If Tenreyro votes with the crowd, then we’ll see a 6-2 vote in favor of maintaining current policies.
But that doesn’t mean that the doves won’t have a chance. BOE’s Chief Economist and known dove Andy Haldane caused ruckus on the pound in late June when he hinted of switching votes when he shared that
“The risks of tightening ‘too early’ have shrunk as growth and, to lesser extent, inflation have shown greater resilience than expected.”
He also added that “a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon” should data come in as expected.
If Haldane votes for a rate hike and Tenreyro starts her term with a bang by siding with the hawks, then we’ll see a 4-4 vote that could attract bulls faster than you can say “Scaramucci.” This isn’t a likely scenario, however.
Instead, the BOE will likely be as optimistic as one could be after downgrading growth estimates. With other central banks (and other MPC members) turning hawkish and the pound recovering from its post-Brexit lows, Carney can’t afford to be too dovish in his presser.
Keep an eye out for remarks on a softer-than-expected Brexit as well as comments on employment trends and their impact on wages.
If Carney recognizes that threats of a “hard” Brexit have abated, then we’ll likely see the pound shoot higher. But if he focuses on low wages and the cooling CPI, then we’ll see the pound retrace some of its recent gains.
That’s it for our guide today! Remember that if you’re not comfortable keeping positions open with these event risks, you could sit on the sidelines and watch price action pan out before figuring out your longer-term bias.