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BOE To Show Cautious Optimism at Thursday’s Policy Meeting

The Bank of England hold their monetary policy meeting on Thursday 5th August at 12:00 BST (21:00 AEST), and we expect an upgrade to their economic outlook.

BOE are to release their economic forecasts at this meeting, and there are reasons to be optimistic. On the 19th July the UK went ahead with ‘freedom day’ by removing all lockdown restrictions. Obviously, it was a rush to the pubs and shops so, if there was any pent-up demand, the second half of July was the perfect time to release it. And that should have a positive impact on growth expectations for Q3.

Vaccinations break the link between COVID cases and deaths

Whilst the doomsayers were highly concerned with the rise in COVID cases that were to follow, covid-related deaths have effectively flatlined to show vaccines have broken the link between cases and deaths. Moreover, cases have been falling over the past week to suggest a top of the current wave is in place.

Furthermore, around 70% of the UK’s population has now been fully vaccinated according to data compiled by the University of Oxford which places within reach of the 80% threshold to declare herd immunity. We therefore expect economic forecasts to be upgraded as odds of lockdowns being reimposed appear to be very slim, unless deaths start to rise relative to cases.

Potential outcomes from Thursday’s BOE meeting

It’s not likely to be a hawkish meeting as such, but one with a cautiously optimistic tone and, therefore not as dovish as previously (which is, in effect, hawkish).

Interest Rates: Rates will almost certainly remain at 0.1%, given that expectations are currently for the BOE to first hike rates in the first half of 2023.

MPC Votes: Member of the MPC (Monetary Policy Committee) voted 9-0 in favour of keeping rates on hold at 0.1%, and we do not expect any change at this meeting. But we may see one or two members vote to taper their asset purchasing program earlier. The Chief Economist of BOE, Andy Haldane, voted to dissented by voting to reduce asset purchases from GBP 875 billion to 825 billion but, as this was his last meeting the move was seen as symbolic and therefore ignored by markets.

Asset Purchases: Whilst there’s no intentions to taper any time soon, we may find out some details over an exit plan to taper their QE programme.

Economic forecasts: Inflation is likely to be upwardly revised given the reopening in July. In turn this could bring forward expectations for a hike to Q4 2022 and send GBP crosses higher. Growth should also be upwardly revised for Q3. And that should be supportive of the British pound.

The pound’s rebound may have more to go

The British pound has been a strong performer since forming lows against FX majors around the 20th July, as lockdown restrictions have been eased and deaths have hardly rise despite a rise in cases. Whilst GBP/USD is currently retracing from its highs, we’re looking for support to build above the 1.3840 area and eventually break to new highs.

GBP/JPY has fallen over the past three days as equity markets moved lower following the sell-off in China’s markets and the rise of the Delta Variant in some states of the US. But we suspect this is a retracement only so, like GBP/USD, are seeking evidence of a swing low to form above 150.0.

EUR/GBP is also rebounding from the July low as part of a correction. Yet with the ECB in full dove-mode, and the UK economy more likely to outperform Europe, we expect the cross to eventually break back below 0.8500. Whether these moves can materialise after Thursday’s meeting remains to be seen, but a slightly hawkish meeting would certainly be a good start.