Thursday’s BoE Interest Decision Likely to Take Centre Stage

By Matthew Vassallo

Last week brought with it multiple economic data releases for the UK, which had a direct impact on the strength of the Sterling. On the back of these we saw GBP’s value rise across the board, which continued almost to the close of European trading on Friday.

The first catalyst for GBP’s upturn was Tuesday’s average earning figures. Whilst these showed only a modest improvement from November’s numbers, the slow rise in average earnings should, in theory, ease inflationary pressure and in turn the Bank of England’s (BOE) need to cut interest rates to help counter the current high inflation gripping the UK economy. Investors’ risk appetite seemingly increased following this release, with the Pound hitting fresh one-month highs against both the EUR & USD.

Whilst the theme of last week was generally a positive one for those clients holding Sterling, as has been the case for much of the past 12-months, any perceived optimism has often been subdued relatively quickly. This was once again the case again following the release of Friday’s UK Retail Sales. Retail Sales data showed a drop to -4.3%, down from 3.2% last month. This number was far worse than the markets predicted and immediately curbed any further significant gains for GBP against its major currency counterparts, as last week’s trading drew to a muted close.

Looking ahead to this week and the Pound may struggle to break free from its current economic shackles. The USD is once again likely to be the currency of choice for investors looking to protect the value of their assets, in an increasingly unstable and uncertain market. The ongoing conflicts in the Middle East and Ukraine continue to negatively impact upon the global markets and in turn investors’ risk appetite. An unexpected upturn in the Eurozone’s economic productivity could also help solidify support for the EUR, which will add another layer of resistance for any prospective Sterling gains.

With little economic data of note for today, tomorrow’s UK housing data and Eurozone GDP & Consumer Confidence figures are the first major data releases of the week. Any improvements within the Eurozone economy could likely scupper the opportunity for further Sterling gains in the short-term. Looking across the pond and Wednesday’s interest rate decision & monetary policy statement by the US Fed is expected to show growth of 5.5%. Any deviation from this figure would likely bring with it increased market volatility for the USD.

However, the key release for those clients holding GBP positions is Thursday’s BoE interest rate decision. Whilst it is widely anticipated that the UK’s central bank will keep interest rates on hold at their current levels of 5.25%, it is BoE governor Andrew Bailey’s subsequent monetary policy address which could have a bigger impact on the market. In it he will outline the UK’s current economic standing and forecasts for the coming weeks. A dovish address will likely curb any significant support for the Pound, as we head towards the latter part of the trading week.