Sterling has been moving in a relative tight range against the U.S. currency this week as traders await today’s Bank of England’s policy meeting, in what seems to be a very tough day for the central bank as the UK’s referendum on its EU membership looms.
Uncertainty generated by the vote is already impacting the economy, with all recent economic data deteriorating. Manufacturing, services and construction activities all declined since the BoE’s April 14 meeting. Wage growth and consumer spending also took a hit, meanwhile inflation is likely to be on the rise with oil prices recovering by more than 70% since their January lows, making the easing scenario a tough call.
Although the BoE has avoided slipping into the political game, the central bank has to address the economic risks attributed to Brexit, and this is what governor Mark Carney is likely to reveal in his press conference in what he described as “a lower path for growth and a higher path for inflation” in a letter to Andrew Tyrie, the Treasury Select Committee chairman. In other words, Mark Carney was referring to a stagflation case scenario, a situation in which inflation shoots, while economic growth rate slows and this is the most difficult situation a central bank can deal with. The inflation report will also take the center stage in providing clarifications on how concerned the MPC are over the recently released data, and whether there is something other than the referendum story impacting the economy.
The case of the BoE presenting two forecasts “Exit & Stay” is very unlikely and the pound’s major downside risk will be Mr. Carneys’ dovish tone, or at least one of the MPC members voting for a rate cut. Traders should be prepared for a volatile trading day on the pound, as there are so many uncertainties surround today’s meeting.
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The U.S. dollar traded slightly higher against its major peers after yesterday’s correction halted a 6-days winning streak for the currency. The upside move is likely to be limited as no major economic releases are due until tomorrow’s. U.S. retail sales release on Friday which is likely to be very interesting, as markets expect to see a 0.8% rebound in April from March 0.3% drop. However, the S&P500 retail sector which dropped by more than 4% yesterday, marking the worst day since Aug 2011, could be raising some questions ahead of the release. Michigan Consumer Sentiment Index, is also due to be released on Friday. The survey should not be ignored either as it is a key component to predict Americans’ future spending habits. Speeches from Fed presidents Eric Rosengren and Esther George today, and John Williams tomorrow are also on traders’ radar for further hints on the direction of U.S. monetary policy.
Sayed is chief market strategist at FXTM
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