The Bank of England Preview

Well, it's a little too early to gloat, but the market has most definitely come around to my view that there is no chance the BoE hikes rates when it meets on Thursday. 

Markets no longer see a BoE rate hike as likely Thursday. 

It feels nice to receive this kind of vindication, the market has been pricing almost 100% chance of a hike in the last couple of weeks (they did the same at the previous meeting where, guess what, they didn't hike), and now it seems like the markets have learned there lesson. 

I have been out front on this issue for a long-time, with the economy fragile, inflation largely down to factors the BoE has no control over, and a stagnating growth environment in the face of the Omicron variant, it's pretty clear that once again, the BoE will not be hiking rates at the next policy meeting. 

The chart below shows the implied rates for upcoming BoE meetings, and clearly there is very little pricing for hikes at the Thursday meeting now. However, hikes are still priced for February and beyond. This becomes a lot trickier to predict further out, but I'd table my first BoE hike for the March meeting, again slower than the market is pricing, but I do think more caution is warranted on the UK economy as a whole. 

Source: Refinitiv 

Basically, the key thing to bear in mind with this meeting is whether there is any narrative change. The BoE has been becoming more hawkish yes, but that doesn't mean there will be hikes at this meeting. At the last meeting, the vote was 7-2 in favour of leaving policy unchanged. What's going to be important is to see whether that number shifts. If we get a 6-3 decision or 5-4 in favour of unchanged, then that could be the barometer for thinking about when we get more hikes. 

What's The Trade? 

I've been advocating a short GBP trade for the last couple of weeks, but I do think it's time to exit that one. The market has moved pretty quickly as in the chart below, so I think the surprise now is more likely to be hawkish than dovish. 

Source: MT5 FXPro 

If anything, I'd say the only pair I'd trade with is a EURGBP - there's just too much USD risk with the Fed ahead. But I don't really have a huge amount of conviction one way or the other, and with the ECB on the same day, I just don't want to be resting on a big position. 

So that's not particularly useful from a trading perspective, but hopefully useful for forming opinions about the BoE in general. 

As always, do reach out with your questions.