Pound Sterling (GBP/USD) Analysis

• Bank of England likely to bide their time given uncertain April inflation data
• BoE statement in focus: will the monetary policy committee tee up the June meeting?
• GBP/USD remains cautious ahead of the meeting and updated quarterly forecast
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Will the BoE Offer up a Dovish Hold Tomorrow?

The Bank of England (BoE) rounds up its two day policy meeting tomorrow when it is due to release the official statement. Previously, Governor Andrew Bailey hinted that the UK can deviate from the Fed with respect to the path of monetary policy – something that many developed central bankers need to get comfortable with.

Generally, central bank heads like to follow the Fed but unfortunately the prevailing growth in the US is not being enjoyed in other parts of the world, meaning the Fed do not appear to be in a position to start cutting rates just yet. However, the BoE forecast in February showed inflation dropping sharply towards the middle of the year, before rising above it for an extended time. Deputy Governor Dave Ramsden – known to be a ‘hawk’ - then communicated to the market that he foresees inflation dropping to 2% and having a notable chance of remaining at target for some time. He went on to describe the risks to the inflation outlook favouring the downside, sending GBP / USD lower along side gilt yields.

Source: Macrobond, ING

Tomorrow’s statement will depend to some degree on the updated quarterly projections. Should the projections align with Dave Ramsden’s dovish comments, inflation over the medium-term would ease towards or hit 2%, down from 2.3% over the two-year horizon. Such a scenario poses a downside risk to cable given the US dollar ’s impressive start to the week as US-UK policy expectations continue to drift apart. The vote split is likely to remain 8-1 (hold, cut) but keep an eye on any change to the forward guidance in the statement referring to rates “remaining sufficiently restrictive” for an “extended period”. Should this wording be dropped, markets may view it as a prelude to June for possible rate cut.

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GBP/USD Eases Ahead of Bank of England Rate Announcement

Cable had eased in the early stages of the London session but after the Europe-US crossover, has risen and is trading around flat for the day at the time of writing. 1.2500 is the imminent level of resistance/support. A close above is needed to keep a bullish move alive but ultimately, markets will react to the new, updated forecasts.

The April inflation print has the potential to throw a curve ball, as this is the month when firms implement contractual or index-linked price rises. Therefore, the committee may choose to read from the same script in the event the April price data provides a bump in the road along the disinflation journey.

More broadly the pair struggles for a clear direction and remains sensitive to incoming news and data (Ramsden’s comments). A greater indication of a June cut could see further pressure on the pair while a decision to tow the line in restrictive policy and kick the can further down the road may see the pair recover recent losses. Resistance appears at the 200 day simple moving average and the 1.2585 mark.

GBP/USD Daily Chart

Source: TradingView, prepared by Richard Snow