All Eyes on The BOE
The main focus over the remainder of today’s trading will of course be the Bank of England’s August meeting. There has been plenty of volatility in GBP over the last month as the market scrambles to gauge the bank’s likely policy response. The difficulty for most is that, while the fundamental backdrop has been improving, reflected in a slew of stronger-than-expected data, downside risks around COVID still pose a big challenge.
Bailey Says Inflation Spike Temporary
As we have heard from other central banks, most notably the Fed, the BOE’s core message over recent months has been that the current and projected uptick in inflation will prove transitory. As such, governor Bailey has argued against the need for adjusting the bank’s monetary policy just yet. However, the BOE has acknowledged that should the current economic trajectory continue, policy adjustment would likely be necessary into the back end of next year.
Hawkish Dissent Growing
However, there has been a growing rift within the BOE recently. Spearheaded by the BOE’s former chief-economist who left last month, there are now a small handful of members that have been voicing concerns over the risks from an inflation overshoot. With that in mind, there are bullish risks going into today’s meeting.
Focus on Votes & Economic Projections
On balance, given the rising concerns around the delta variant globally, and with UK deaths increasing again, it seems reasonable that the BOE will look to reaffirm a message of caution. As we heard from the Fed at its last meeting, the BOE is likely to acknowledge the better data recently, while highlighting the remaining risks, urging caution in tapering QE. However, given the growing rift, there might be a surprise in the voting today with any dissenting votes likely to be taken as a sign that hawkish risks are growing. Keep an eye also on the updated set of economic projections, with any upward revisions there (particularly inflation) likely to drive GBP higher near term.
The 1.3997 mark is really looking make or break for GBPUSD now. Following the second decline from 1.4248, we are looking at a potential double top scenario if price fails from this peak, putting the focus on a break lower. However, if price can move above this current resistance level, in line with bullish MACD and RSI, that will put the focus firmly back on a test of current YTD highs.