The pound stuck to a narrow range vs. the US dollar yesterday, trading just above 1.31 for most of the day. UK Manufacturing PMI printed more or less in line with expectations and US data was mixed. Investors have also been reluctant to do much ahead of today’s much anticipated Bank of England monetary policy announcement.
The Old Lady is widely expected to raise interest rates from 0.5% to 0.75%, but it’s not fully priced in, and there are a few different scenarios that could play out, particularly so when Carney speaks following the announcement. If the bank raises rates but Carney cites Brexit risks and signals interest rate neutrality for the foreseeable – the most widely anticipated scenario - then any upside in GBP may be limited. If the bank leaves rates on hold (markets expect there’s a 10% chance of this happening), no matter what Carney says, the pound will likely fall, and break down through 1.30. The bank and Carney’s credibility may also be at risk in this circumstance, given they haven’t taken an opportunity over the last month or so to extinguish the market’s growing expectations that the BoE will hike today. Other scenarios such as raising rates/whilst taking a hawkish stance are so unlikely at this stage it’s hardly worth considering, but either way there’s a good chance we’ll see some volatility in the pound today.
The bank also publishes its Inflation Report in which we’ll get details on forecasts for short, medium and long term inflation. In the last report the BoE saw inflation at 2.35% in 2-3 years, based on unchanged monetary policy. Meanwhile, there’s less data due out from the US today but traders will have half an eye on tomorrow’s Non-Farm Payrolls.