Cable traders are bracing for an avalanche of data coming out of the UK this week, with almost every data point that is relevant for the BOE’s upcoming rate decision. Markets are putting the odds of November BOE rate hike at 92%, but that could change depending on what the upcoming data says. Generally, traders are expecting the figures to confirm the hike, which would help support the pound. However, if there are disappointing results, then the odds of a BOE hike could drop and that could weaken sterling.
Cable managed to stage a recover late last week following by unexpectedly strong UK GDP and strong bound in factor production. This coincided with weakness in the US dollar as yields pulled back on Friday after Fed Chair Kevin Warsh offered vague forward guidance, and didn’t change his tune following a stronger inflation print.
What the Market Is Looking for
This week, the focus will be almost entirely on the UK side, with the release of inflation figures, unemployment data and retails sales giving traders a better picture of the landscape ahead of the two major risk events for cable: The BOE rate decision and the Autumn Budget.
First is Tuesday’s release of labour data ahead of the market open. Until the surge in energy prices, BOE Governor Andrew Bailey had justified a dovish bias on growing slack in the job market. The situation hasn’t improved substantially, just that the consumer prices problem has worsened. As long as the labour market stays in line, then the BOE is likely to keep hiking. But, signs of trouble in the job market could cause some of the less hawkish members to hesitate.
Markets Looking to Assess Risk
The consensus is for the unemploymen to remain unchanged at 4.9%, while the employmen change is projected to remain in line at 60K jobs added compared to 67K the month earlier. If this data moves contrary to the inflation figures, it’s likely the market will prioritize prices. However, if the data shows similar direction, then it could exaggerate the market move on Wednesday.
Markets are likely to be the most concerned about rising inflation followed by signs of slowing economic output. Cooler inflation would keep the BOE on hold, while a cooler economy would likely raise long term yields.
Core Inflation In Focus
On Wednesday before the market opens is the release of UK inflation data, which is expected to show another increase in the headline rate to 3.4% from 3.1% a month earlier. This is seen driven almost entirely by higher energy costs. The core rate is projected to tick u pto 2.7% from 2.6% previously. Markets will be keen to see if this latter number rises or remains steady. A drop here would suggest that there is broader economic weakness that is dragging down consumer prices and this could lead the BOE to hold off on a rate hike.
Bailey will be giving what could be his final remarks before the rate decision on Thursday, and it will be an important opportunity to get his reaction to the latest data. His comments could cause the market to pull back on any major move if he doesn’t appear to react to a notable change in trend. Finally, on Friday is the release of UK retail sales, expected to slow to 0.1% from 0.6% previously.
