BOE Preview: Can Carney crash cable by cutting forecasts? Or is the Brextension bullish?

The Bank of England publishes its rate decision, the Meeting Minutes from its deliberations, and the Quarterly Inflation Report (QIR) on Thursday, May 2nd, at 11:00 GMT. Governor Mark Carney will meet the press at 12:30 GMT. 

Economy doing well, but Brexit

The UK economy is still doing well, with wages rising at a satisfactory rate of 3.5% YoY while inflation remains tame at 1.9% YoY. The Unemployment Rate remains at a low of 3.9%, and credit is cheap.

The BOE would like to stay ahead of the curve on inflation and prevent cheap credit from having undesired effects, hiking rates once again. Their previous projections have shown rising inflation, and they signaled a rate hike this year.

Carney and co. have already raised rates to 0.75%, above the seemingly-eternal post-crisis level of 0.50% and above the post-Referendum emergency level of 0.25%. 

However, like all policymaking in the UK, everything is paralyzed by Brexit. The high level of uncertainty and the potential no-deal Brexit prevented any action. Brexit was getting closer, first on the original date of March 29th and then on April 12th, but it was eventually postponed to October 31st, Halloween.

May's decision is the first decision made after this "Brextension". There are almost six months to go, and a new question arises.

After the Brexit delay, does the BOE see more clarity or less?

Does the BOE now see calmer conditions that would allow for a rate hike? Or does the ongoing darkness around the momentous event take any tightening off the table? 

The BOE may stick to its forecasts and claim it is unable to make any political assumptions. The answer to the question depends heavily on the Bank's projections in the QIR. If the recent drops in prices are seen as temporary, the BOE may stick to its guns and continue saying it wants to raise rates. In this case, GBP/USD has room to rise.

However, the BOE is not isolated from politics nor the actions of central banks elsewhere. The Fed turned dovish, the ECB pushed back on its hike forecasts, Japan pledged "lower for longer" on rates, and other CBs are also moving becoming more dovish.

If Carney and co. remove rate hikes from the table, regardless of Brexit, GBP/USD has room to fall.

Apart from the next direction of interest rates, markets will also want to know who will head the Old Lady. Carney concludes his term at the end of the year and markets are already seeking clues about who will succeed him. Carney will leave the answer to the government, but any hint about the new direction will be closely watched. 

Conclusion

The critical question for GBP/USD is if the BOE still wants to raise rates this year or not. The Brexit extension, the lower inflation, the upbeat economy, and the dovishness of other central banks are all factors to consider.