At its last meeting, the BOE cut its inflation outlook for this year, saying it will fall below target in the second half. This was interpreted as a sign that the central bank will cut rates at the next meeting in March. However, that depends on the data matching expectations, or being even more dovish. The pound and cable could fluctuate substantially this week as the UK provides a barrage of data in the coming days, including crucial jobs and inflation figures.
The pound was the weakest of the major currencies last week primarily as a result of the market pricing in a rate cut in March. Prime Minister Kier Starmer suffered a challenge to his leadership at the start of the week over the appointment of Peter Mandelson as Ambassidor to the US. However, analysts noted that Labour MPs are not invested in a leadership contest at this juncture. The UK is heading into local elections in May, and politicians would likely want to focus on that event. This could mean that the pound remains somewhat buffered from political issues in the short term.
Breaking the BOE Tie
Unlike other major central banks where policy is set with mostly unanimous votes, the BOE’s history of split decisions keeps markets a little more on edge, since just one person can affect policy. This is especially true of the last three meetings which have been decided 5-4. The same four hawks and doves have voted consistently, with Governor Andrew Bailey casting the deciding vote.
After the last meeting, his comments were seen as a signal that he’s likely to switch his vote from hold to cut. On that basis, the market is currently pricing in a BOE rate cut at the next meeting. However, a fluctuation in the data could change that outlook, as well as a change in Bailey’s rhetoric if he makes a public appearance. This means cable could be particularly volatile in the coming days.
Continued Slack in the Labour Market
The UK will publish key job market data on Tuesday. The unemployment rate for December is anticipated to stay unchanged at 5.1%. At the same time, the January claimant count is projected to rise to 22.8K from 17.9K in December. Remember that the claimant count is the number of new people who have lost jobs, so the higher it is, usually the worse it is for the pound.
Traders will be looking for signs that slack in the labour market is at least maintaining or increasing. That can be seen in the unemployment number, which if it matches expectations or rises, would reassure traders of their expectations for March rate cut. However, a drop in the unemployment rate or a negative claimant count could support the pound as the market would likely delay its projections for lower rates.
Meeting Inflation Expectations
UK January CPI figures are published on Wednesday with the consensus for the headline number to drip to 3.0% from 3.4% a month earlier. However, the focus will likely be on the core figure, which strips out more volatile energy and food prices. This is expected to decline to 3.1% from 3.2% previously and remain well above the BOE’s 2.0% target.
Economists and the BOE expect a sharp drop in inflation over the coming months which would justify rate cuts. So, if inflation remains on a downslope, markets are likely to continue to weaken the pound in anticipation of the upcoming easing. But if inflation were to turn around and come in hotter than expected, this could support the pound as the market prices in a later rate cut.