The consensus is that the BoE will slow the pace of hiking, as we are expected to see with the week’s other major central bank decisions.

The Bank of England’s Monetary Policy Committee (MPC) will meet on Thursday to decide on interest rates. The MPC meeting will be sandwiched between the FOMC rate decision that will have taken place the day before, and the ECB rate decision that would follow an hour and a bit later. The GBP/USD, EUR/GBP and FTSE will be among the markets in sharp focus on the day.
 

What do analysts expect?

The consensus is that the BoE will slow the pace of hiking, as we are expected to see with the week’s other major central bank decisions. Economists expect the UK central bank to raise the benchmark interest rate by 50 basis points, which would bring the Official Bank Rate (OBR) to 3.5%. If correct, this will mean the previous 75 basis point hike was just a one off.

At the previous meeting, the BOE hiked rates by 75bps but warned that the terminal rate will be lower than markets are anticipating due to a current recession, which could last up to 2 years.  The pound nonetheless rallied and reached north of $1.24 handle by Tuesday, when a much-weaker-than-expected US inflation report sent the dollar and Treasury yields plunging.
 

Double-digit UK inflation

It will be interesting to see what the Bank of England will make of the latest upsurge in inflation. Since their last meeting, UK CPI has risen further, from 10.1% YoY in September to 11.1% YoY in October.

It should be noted that the November CPI reading is due out on Wednesday, the day before the BOE meeting. Expectations are for CPI to fall to 10.9% YoY. If the reading is higher, could the MPC surprise the markets and hike by 75bps?  While that could be a possibility, it is worth pointing out that the UK is facing several other risks too.
 

UK economic woes

In addition to double-digit inflation, the UK is dealing with the various strikes across the nation.  Nurses, rail workers, border force and others either have or are threatening to strike over conditions and pay.  The UK has summonsed the military and civil servants to try and fill some of these positions over the holidays. This may well hurt economic activity in this final month of the year, during the crucial holiday season. Knowing the risks, this may discourage the hawks among the MPC from voting for a bigger hike.

In addition to the latest inflation data, the BOE will keep a close eye on a host of other data before it meets on Thursday. These include the October GDP print, wages and jobs data.  GDP came int at +0.5% MoM vs +0.4% MoM expected; the Average Earnings Index printed 6.1% 3m/y as expected and the Claimant Count Change was 30.5K vs. 3.5K eyed. While wages may be rising, pay growth in real terms when adjusted for inflation continues to fall. The latest wages and CPI data shows a disparity of 2.7% on the year from August to October. This is one of the largest falls in real growth ever recorded.
 

GBP/USD breaks 1.23 handle

(Click on image to enlarge)

Following the surprisingly weak US inflation data, the GBP/USD broke above the key 1.2300 resistance level, which had previously capped the gains back in August and more recently at the start of this month. So, the path of least resistance was the upside at the time of writing. However, with the Fed and BoE both set to meet this week, things could look and feel a lot different later in the week.

If by Thursday afternoon the GBP/USD is still holding its own above this 1.2300 level, then the path of least resistance would remain to the downside towards 1.2500, possibly even 1.2750, where the 61.8% Fibonacci level comes into play.

However, if the cable has gone back below the 1.23 handle by Thursday afternoon, then this could spell trouble for the bulls – especially if rate go on to break back below the 200-day average and previous low around 1.2105.

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