UK Backdrop Improving
The June BOE meeting today will be the week’s main event. FX markets are highly sensitive now to any signs of central banks looking to move away from monetary easing with hawkish meetings from the BOC and the Fed prompting sharp currency moves. Given the vaccine success in the UK, the broad improvement in fundamentals and the success with reopening (despite the final delay), the expectations into today’s meeting are skewed to the hawkish side.
The BOE itself has retained a mostly positive tone over recent months. We’ve heard Andy Haldane, the BOE’s chief-economist, stating his concern over the rise in inflation and the need for the BOE to address the situation to prevent inflation spiking too high.
With UK data continuing to improve over the last month, the fundamental backdrop certainly looks supportive. The only current fly in the ointment is the delay of the final round of lockdown easing. However, with the majority of the economy now open and staycation demand looking elevated, the economy looks set to be able to weather the current storm.
Focus on Guidance
Given the cautious tone with which the BOE has tempered its recent optimism , it seems unlikely that the bank will go full throttle today and announce any policy changes. Therefore, the focus will be on guidance. If the BOE points to a likely start date, or set of conditions, for removing monetary stimulus, this should give the meeting a hawkish spin and send GBP higher subsequently. Furthermore, given Haldane’s dissent on continuing easing and that this is his last meeting, the voting is likely to show an 8-1 split, which could also offer GBP some support.
The main downside risks stem from how the bank judges the threat from the new delta variant and the risk of lockdown being delayed or possibly even reversed. If the BOE downplays the economic progress being made and leans more towards retaining a cautious tone, this will likely underwhelm markets, sending GBP lower.
The recovery in GBPUSD off the rising trend line has so far been capped at a retest of the 1.3997 level. With MACD and RSI both bearish, while below here there is room for a further drop down towards the 1.3676 level next. Above 1.3997, the 1.4248 highs are the next bull target.