- Straightforward on-hold decision without any notable change in the MPC's communications expected
- TD Securities find risks are biased towards further gains for the Pound
Governor of the Bank of England Mark Carney © Simon Dawson, Bloomberg, Bank of England
The British Pound trades on the front-foot ahead of a key Bank of England policy event that is expected to prime markets for higher UK interest rates in coming months.
The Pound-to-Euro exchange rate trades at 1.1457 at the time of writing following 11 successive days of gains, any disappointment from Governor Mark Carney and his fellow policy-setters could put an end to this impressive advance.
The Pound-to-Dollar exchange rate meanwhile trades at 1.4147, having been as low as 1.3712 earlier this month. A recent boost to the exchange rate comes following a bout of Dollar weakness that was triggered in the wake of the US Federal Reserve's March 21 policy event, details of which can be found here.
Markets are expecting no change to interest rates at the March 2018 Bank of England Monetary Policy Committee meeting but money market pricing for a May interest rate rise shows expectations for a rate rise of 0.25% are running close to 90% at the time of writing.
What will therefore matter for the Pound at the March event therefore is the tone of language used in signalling that May interest rate rise AND any hints for or against future interest rate rises.
Nuance is important for the Pound when it comes to the Bank of England and the currency's reaction can therefore be confusing for those watching the market as the event unfolds.
Fortunately, the team at TD Securities have furnished their clients with a cheat-sheet which assigns a likelihood to three potential scenarios for currency markets.
"We expect a straightforward on-hold decision without any notable change in the MPC's communications. Amid progress in Brexit negotiations and positive news in today's labour data, we think that this outcome is now largely priced into markets," says James Rossiter, Senior Global Strategist with TD Securities in London. "We doubt clear hints of a May hike will emerge but this could earn a vote or two: Carney hinted the MPC would not reinforce the exact timing of the next move."
The Three Scenarios
The Hawkish Scenario: Pound Up Sharply (10%)
Under this scenario a member of the Bank of England's Monetary Policy Committee opts to vote for an immediate interest rate rise while the language of the minutes to the policy meeting signal a strong intent to raise rates in May.
Rossiter reckons the most pro-Sterling outcome that falls under this scenario relates to any communication to subsequent rate rises to that in May.
The analyst says under such a scenario the BoE re-introduces last autumn's language, all-but announcing a May hike: "some withdrawal of monetary stimulus is likely to be appropriate over the coming months".
Another signal would be delivered should one or more members of the MPC vote to hike this week.
This scenario could see the GBP/USD exchange rate go to 1.4345 and the GBP/EUR exchange rate go to 1.1621.
The Neutral Scenario: Pound Up a Tad (70%)
Under the most widely-anticipated scenario the MPC opt to strike a balanced tone that is unremarkable when compared to previous meetings.
"Relatively little changed in the monetary policy summary or minutes, repeating that a rate hike will come soon, but still no explicit guidance if it will be May or August," says Rossiter.
This scenario could see the GBP/USD exchange rate go to 1.4185 and the GBP/EUR exchange rate go to 1.15.
The Bearish Scenario: Pound Goes Lower (20%)
The Pound could come under pressure were the MPC to cite recent data which has underwhelmed of late, (eg retail sales & inflation) which leaves the MPC a little less confident about the economy in 2018.
TD Securities believe that under this scenario the MPC says it wants to wait until the May forecast round to determine the impact on its inflation forecast.
"Rate hike language softened or reverts to more cautious 2017H1 language, to suggest rate hike will be later this year, not May," says Rossiter.
This scenario could see the GBP/USD exchange rate go to 1.3905 and the GBP/EUR exchange rate go to 1.1312.
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