Pound sterling has been flirting with the 1.3 level for most of the past week, but failing to break above this key level indicates that a strong catalyst is needed to convince traders to go long from here. Whether we see a break above or a pullback hinges upon the Bank of England’s decision and the quarterly Inflation Report issued today.
Although market participants are confident that interest rates won’t change today, there seems to be divided opinion on what messages we’ll receive due to the mixed economic data releases in the past couple of weeks. On the positive side, unemployment is at its lowest levels in twelve years, economic activity is improving based on PMI’s, and inflationary pressures are building with consumer prices above 2%. On the downside, GDP came well below expectations in Q1, consumers are hesitant to spend, wage growth is not keeping pace with inflation, and housing activity is heading south. The central bank will also take into consideration the political hurdles of the snap general election on 8 June and UK’s negotiations with the EU.
Overall, I think there’s little reason for the BOE to shift expectations one way or the other. The base case scenario is to wait and see until we get more clarity on both the economic and political outlook.
Although I don’t see sufficient support for GBPUSD to trade much higher than current levels, if any MPC voting members join Kristin Forbes to vote in favor of a rate hike, the pound is likely to break above the 1.3 level, as a shift to the hawks will suggest a rate hike coming soon.