Thursday’s Bank of England meeting will likely see the central bank remain in a bit of a Brexit bind, but clarity over the recent downturn in economic data and the future of inflation could prove net hawkish for the market.
Brexit uncertainty, a slumping Eurozone economy and a stalling housing market are certainly enough reasons for the Bank of England to remain on standby, but it is highly likely that a hawkish twist will occur. Inflation was previously projected to hover around the 2% target with a 30% level of confidence, but due to rising wage growth since November, the latest inflation projections are likely to rise by the end of 2019 to show more substantive upside risks. Furthermore, questions to Carney will likely dial in on the latest economic data releases which have previously proved enough for the Bank of England to change their assessment of the UK economy and alter monetary policy. Should the Monetary Policy Committee see the latest downturn in PMI data as a transitory by-product of Brexit uncertainty, that could quickly reverse if a deal is ratified in Parliament, a further hawkish bias to the meeting is added. The ball then remains firmly in Brexit’s side of the court to determine the exact timing of the economic rebound, something that at present remains ambiguous at best.
Should the bank’s inflation projections rise and the latest PMIs be disregarded as a broader slowdown in production by Carney, the market may begin to change its 50/50 stance on another 25 basis point hike by the end of 2019.
With Brexit uncertainty remaining in abundance, a mildly hawkish Bank of England remains net positive for sterling, especially after the knee-jerk selloff from this week’s PMI data.
If this is the case, further upside pressure will be added to the pound as it awaits the green light from Downing Street. The result of which could see the sterling push back towards the $1.32 level against the dollar while regaining lost ground against a softening euro.
Chart 1: Sterling breaks 200-day moving average, which proved to be a key support level after negative surprises in PMI data on Tuesday.
Chart 2: Purchasing Manager’s Indices point toward slowing growth in the UK economy, but have proven susceptible to political adjustments previously.