Morning Brief – Central banks in the driving seat

Charles Porter
Thu 22 Jun 2023

Central banks in the driving seat 

Following testimony from Jay Powell that dominated trading yesterday afternoon, attention will today once again shift to the Bank of England. The BoE has been in the spotlight as UK inflation data continues to trend above similar statistics being released in other developed economies. Yesterday, the most recent reading of inflation cemented the trend of above-consensus inflation, with the headline figure remaining unchanged versus May’s reading. The adverse data released yesterday has left UK terminal rate expectations comfortably above 6% once again moving into today’s decision.

Based upon the trend and inaction of the Bank of England during this hiking cycle, it is unlikely that the committee opts for an outsized 50-basis point hike today, despite building pressure to do so. That will likely lead to the scenario where, despite a standard 25-basis point hike, Sterling fails to attract demand as the BoE fails to convince the market it will do what it takes to bring inflation down. The additional risk moving into this meeting is created by the level of GBP against most crosses but particularly against the US Dollar. During testimony from Jay Powell yesterday the market continued to push GBPUSD up to recent record highs, leaving that pairing and GBP in general more vulnerable to a correction.

Testimony from the Federal Reserve Chair continues today, creating further risks behind USD and potentially inviting volatile trading conditions. Despite the base case being for a dovish hike and Bailey failing to satisfy money market expectations, there is an outlying risk that a more hawkish BoE sends GBP higher. Firstly, whilst in the minority but still priced into the tune of around 40%, the Bank could opt for the 50-basis point hike. That would signal an intention to raise rates to the kind of levels the market is expecting and bolster GBP. Secondly, any inclination by the Governor that rates could match current market expectations although unlikely would see Sterling leap higher in defiance of previous advice from the Bank.

Discussion and Analysis by Charles Porter

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