The Bank of England (BOE) is set to hold its rate decision meeting on Thursday, but markets face a slightly complicated situation. Two key major bits of data will come out in the days before the meeting. That could potentially cause the market to recalibrate its expectations for the meeting, and significantly upset the pound.
Sterling has been the only major currency to hold its own compared to the dollar since last month’s election in the US. This has been mainly based on expectations that the Bank of England (BOE) will be the slowest of the major central banks to ease in the current cycle. But, if the data points to a scenario that’s different than what is expected, cable could move substantially as it tries to catch up with other currencies.
What’s the Issue
The UK labor market has shown uncommon resilience over the last couple of years, despite the country slipping into a technical recession at the end of 2023. This has meant wages have continuously outpaced inflation, and the services sector has seen demand-driven inflation remaining persistent. As a result, the Bank of England (BOE) hasn’t been able to declare victory over inflation, and Governor Andrew Bailey has been warning for a couple of months now that rates might stay elevated for a while.
The Budget introduces an additional wrinkle, as the increased taxes are expected to be passed along to consumers, raising inflation and preventing further easing. However, a recent survey by the BOE showed that around half of employers expected to slow down hiring as a result of the Budget’s increased labor costs. If that were the case, then the loosening in the labor force would likely finally give the BOE room to start easing. Traders are likely to be looking closely at the upcoming jobs figures to see if the market remains as tight as before, and that would decide whether they move to expect more easing.
What to Look Out For
Markets are pricing in over a 90% chance of a hold at the upcoming BOE meeting. That means there is still a chance of a small move in cable even if everything goes according to plan. The vote will also be closely scrutinized for clues as to what will happen at the next meeting. The market isn’t expecting a rate cut at the start of the new year, either. So, a large contingent voting in favor of a cut now might move those expectations forward.
Economists expect the jobs figures to remain largely unchanged, which would leave the BOE in a holding pattern. An unexpected uptick in unemployment or claimant count could weaken the pound ahead of the meeting. The forecast is for the unemployment rate to stay at 4.3%, with the claimant count remaining in the same ballpark at 30.5K compared to 26.7K prior.
The Other Data That Could Shake Things Up
The ONS will also publish the latest inflation figures the day before the BOE’s meeting. But, the market already expects inflation to tick up slightly on the back of higher energy costs. The BOE has also factored in a marginal increase in inflation through the end of the year, which is expected to recede early in 2025. So, it would likely take a larger move to the upside to disconcert markets. But a significant miss in inflation has a better chance of causing the pound to weaken, as it would be a bigger surprise that consumer price growth is coming into target sooner than expected.
UK headline inflation is forecast to stay unchanged at 2.3%, while the core rate is expected to tick up to 3.4% from 3.3% prior.
