GBP JPY - FUNDAMENTAL ANALYSISMonetary Policy: A Hawkish Stance?
The BoE's impending monetary policy decision is a critical factor underpinning Sterling's performance.
The analysts' consensus is that the BoE will adopt a hawkish stance, with a 25 basis point hike in the bank rate. This move would bring the bank rate to 4.50%, in line with market expectations.
"We expect the BoE to hike the Bank Rate by 25bp bringing it to 4.50%, which is fully priced by markets," says Kirstine Kundby-Nielsen, Analyst, FX Strategy at Danskebank.
She adds, "In our base case of a 25bp hike, we expect the reaction in EUR/GBP to be rather muted on the release but move slightly higher during the press conference."
Similarly, Valentin Marinov, Head of G10 FX Strategy at Credit Agricole, also foresees a rate hike.
However, he points out that the Monetary Policy Committee (MPC) may remain divided over the need for further aggressive hikes.
"We expect that the MPC will deliver a 25bp rate hike today to lift the bank rate to 4.50% but think it will remain divided on the need for further aggressive hikes," says Marinov.
Rate Hike Cycle: Nearing its Peak?
Another hotly debated topic among analysts is the trajectory of the BoE's rate hike cycle. While some believe that the current cycle is nearing its peak, others argue for its continuation, contingent on the data.
ING Economics' FX Strategist, Francesco Pesole, suggests that the BoE might be close to hitting the peak in its rate hike cycle.
He cites the primary drivers of inflation, namely food prices and core goods inflation, as temporary phenomena and expects a rapid deceleration in CPI later this year.
"Today’s 25bp hike may well be the last one in this cycle," says Pesole.
"The drivers of higher-than-projected inflation have primarily been food prices and some surprising stickiness in core goods inflation: neither of those trends look likely to be long-lasting," he adds.
On the other hand, Danskebank's Kundby-Nielsen anticipates that the BoE will communicate a 'pause' in its hiking cycle to fully assess the impact of previous rate increases.
However, she highlights that this decision will be heavily data-dependent.
"In its statement we expect the BoE to prime markets for a pause in the hiking cycle as the central bank wants to fully evaluate the effect from previous Bank Rate increases before deciding on next steps," says Kundby-Nielsen.
"However, as always, all future decisions will be data-dependent," she adds.
Outlook for the Pound Sterling: Where Next?
The impending BoE decision is also expected to have significant ramifications for the sterling.
While the overall outlook appears cautiously optimistic, the currency's fate is contingent on multiple factors, including the BoE's future monetary policy stance and the pace of economic recovery.
MUFG's Senior Currency Analyst, Lee Hardman, observes the sterling trading close to its year-to-date highs ahead of the BoE meeting.
The strengthening of the sterling, particularly against the euro, reflects the fading investor pessimism about the UK's economic outlook.
Hardman also notes the resilience of the UK economy and the persistent inflation and wage growth, which puts pressure on the BoE to maintain its rate hike cycle.
"The pound is continuing to trade close to year-to-date highs ahead of today’s BoE policy meeting," says Hardman.
"The resilience of the UK economy at the start of this year alongside still uncomfortably strong inflation and wage growth keeps pressure on the BoE to keep raising rates," he adds.
Francesco Pesole of ING Economics also discusses the sterling's recent strength, attributing it in part to aggressive market expectations of BoE tightening. However, he believes that these hawkish expectations may be excessive and could be scaled back.
"We acknowledge that part of GBP’s recent strength has been due to the market’s aggressive expectations about BoE tightening, and therefore recognise there are downside risks as those (excessive, in our view) hawkish expectations are scaled back," says Pesole.
BoE's Forward Guidance and Sterling's Reaction
Much of the sterling's reaction post-BoE decision would depend on the central bank's forward guidance. Tullia Bucco, Economist at UniCredit Bank, anticipates that the BoE will likely maintain a data-dependent approach without offering explicit rate guidance, leaving the sterling's performance hanging in the balance.
"A 25bp rate hike to 4.50% is expected, and sterling’s reaction will therefore likely mostly depend on the message that BoE Governor Bailey conveys in his press conference," says Bucco.
"The risk is that no rate guidance will be delivered today, with the BoE stressing that further rate decisions remain data dependent, which might not offer sterling much support either," she adds.
Nikesh Sawjani, Economist at Lloyds Bank, highlights that the 25bps rise would make it the twelfth consecutive hike in the current cycle which began in December 2021.
The cumulative tightening since then would total 440bp. Sawjani draws attention to the fact that current CPI inflation is much stronger than the BoE had anticipated, with March's headline CPI at a substantial 10.1%, notably above the BoE staff forecast of 9.2%.
Sawjani also anticipates an upward revision of GDP forecasts, backed by possible GDP growth in Q1 and survey evidence of improved economic confidence and activity at the start of Q2. Additionally, he expects that fiscal measures from the March Budget and lower-than-assumed energy prices will likely support real incomes, further bolstering GDP.
"New BoE economic forecasts will provide an update on the medium-term growth and inflation outlook," says Sawjani. "Overall, it seems likely that GDP forecasts will be revised higher. All else being equal, that would lead to a higher medium-term inflation profile although not sufficiently to prevent an undershoot of the 2% target in 2024 and 2025," he adds.
