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BoE Preview: Carney to keep his options open

The Bank of England is meeting to discuss its monetary policy once again this Thursday, in what investors have come to call a "Super Thursday," as the central bank will not only unveil its decision but also offer a review of its economic outlook. Overshooting inflation over the past few month has prompted speculation that Carney & Co. will have no choice but to revert their immediate post-Brexit referendum's decision of cutting rates to record lows of 0.25%.

UK's inflation rose by 2.3% in March, up to that level for a second consecutive month, steady at three years highs, and above BOE's target of 2.0%. The advance was backed by the sharp decline in Pound, and exacerbated by slower wage growth. In the meantime, UK economic data were extremely resilient to gloom post-Brexit perspective, suffering a setback at the beginning of the year, but showing signs of picking up in the second quarter of this 2017.

Nevertheless, the economy grew at a disappointing pace, up by 0.3% in Q1, which may force the MPC to recalculate its growth forecast towards the downside. Given that inflation seems to have stabilized, there's a good chance that forecasts in the matter remain unchanged. Further supporting the case for a steady BOE is the latest recovery in the Pound, after PM Theresa May called for early elections.

Attention will center in how MPC members vote, with expectations at 7-1, reduced to a total of eight after Charlotte Hogg left, and revisions of growth and inflation forecasts.  Overall, seems policy makers have little room for being optimistic, but at the same time, it doesn't seem that things are bad enough for a dovish outcome, suggesting the meeting could end up being a non-event this time.

Effects on GBP/USD

Pound's latest move has been clearly linked to UK's upcoming election, with hopes of a May victory backing the GBP, as such result will support her stance on Brexit's future. Still, central banks' opinions always matter.

A hawkish stance, with Carney suggesting that the bank is becoming less tolerant to high inflation as in inclined to raise rates, will end up fueling GBP/USD´s rally beyond 1.3000. A neutral stance with doors opened in both directions, should have limited effects on the currency, whilst a dovish stance could trigger a downward corrective move, but unless an explicit announcement on rate cuts, the GBP/USD pair is hardly seen below 1.2700.

The key levels to the upside are 1.3000 first, followed by the 1.3060 region, where the pair bottomed/topped multiple times late 2016. Once beyond it, 1.3110 comes next. Below 1.2900, on the other hand,  will expose 1.2830, followed by the 1.2760 region, the lowest since May's announcement early April.

Author

Valeria Bednarik

Valeria Bednarik was born and lives in Buenos Aires, Argentina. Her passion for math and numbers pushed her into studying economics in her younger years.

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