Markets are unsure about what the BOE will do at its meeting this week, which creates a volatile situation for the pound. Cable has been on the backfoot after US inflation data raised the odds of a Fed hike this week. The question for GBPUSD traders is whether the BOE will hike as well, and the odds of that have been increasing recently.
The market could price in the outcome of the rate decision two days early due to a barrage of UK data coming out on Tuesday and Wednesday that will be critical for the BOE’s thinking. The GBPUSD has been consolidating to falling over the last several sessions, and the data will likely determine whether that trend continues or there is a rebound.
Why the Market is On Edge
Markets are currently pricing in around 30% odds that BOE will raise rates by 25bps at the upcoming meeting, with the odds rising to over 66% at the November meeting. The trend has been to the upside over the last three weeks, and jumped substantially compared to Friday. This means that regardless of the outcome, the market is likely to move, unless the upcoming data provides a substantial surprise.
The issue is that there have been conflicting trends, with rising slack in the UK economy pressuring the BOE to hold, while an escalating conflict in the Middle East raises inflationary pressure. Predicting geopolitical risk is particularly uncertain, so investors are going to be looking for some kind of confirmation in the economic data.
What the Market is Looking For
The first of the major data drops is on Tuesday, with the release of key jobs figures from the UK. The consensus is for UK July unemployment to rise to 5.1% from 5.0%, deepening the slack issue that is troubling the pound. Traders will also focus on the payrolls change figure, which is more recent, covering the month of August. The consensus is for the UK to have lost another 4.0K jobs in August, after -13K in July.
Next up on Wednesay is the release of inflation information, with markets expecting rising consumer prices. The headline August UK CPI change rate is expected to accelerate to an annual 3.1% from 2.9% prior. The gain is attributed to a combination of rising energy prices and increasing costs in the broader economy. That latter part is likely the main concern for the BOE. The consensus is that UK August Core CPI will tick up to 2.7% from 2.6% a month earlier.
How the Market Will React
Markets are likely to move if the two key data points point in the same direction, with the highest chance of volatility if the data is contradictory. If the unemployment rate does not go up as expected, and inflation is hotter than projected, this would make the case for an earlier rate hike. If the odds move to over 50%, the pound could gain substantially, as the BOE might keep pace with the Fed.
On the other hand, if the unemployment rate is higher than anticipated and inflation remains unchanged, the market will likely expect the BOE to hold off on tightening until at least November. This would likely weigh on the pound, as it implies the rate gap with the US would widen. If the unemployment rate rises alongside higher inflation, or if the unemployment rate stays the same while inflation does, the market will likely wobble as it waits for the BOE to decide.
