BOE Unchanged in August

The British Pound has been trading higher over the last 24 hours following the August Bank of England meeting held yesterday. While no change in monetary policy was expected, traders’ expectations were geared to the hawkish side in light of the ongoing economic momentum, reflected in stronger data recently, and the continuing vaccination success. With this in mind, there was a great deal of focus placed on the bank’s forward guidance, as well as its latest set of economic forecasts.

Guidance On Tapering

The BOE held its monetary policy on hold, as expected, and notably there was no fresh dissent among policymakers who voted 7-1 in favour of keeping rates and asset purchases at current levels. However, the details of the statement noted a clear hawkish shift. Policymakers agreed that should the economic recovery continue at current trajectory, then: “some modest tightening of monetary policy over the forecast period is likely to be necessary to be consistent with meeting the inflation target sustainably in the medium term”. Adding further detail, the bank noted that it will begin scaling down QE when policy rate shit 0.5%, from the current 0.1% level. Most market players judge this level will likely be hit mid-2023.

Inflation To Move Higher – Still Transitory

With regard to inflation, the bank maintained a broadly unchanged message from last time around with the statement noting that “The committee’s central expectation is that current elevated global and domestic cost pressures will prove transitory.” However, within the guidance on inflation there were hawkish signals too with the BOE noting that “the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May Report. And, alongside temporary constraints on supply, the rapid recovery in demand has eroded spare capacity such that the economy is projected to have a margin of excess demand for a period.”

Inflation Forecasts Lifted, Growth Forecasts Cut

Concerning the updated economic forecasts, the BOE revised its inflation forecast higher, accordingly, to above 4% by year end and above 3% by end of 2022. However, the UK growth forecast was revised lower to 7.7% by year end, down from 8% prior.

Technical Views

GBPJPY

For now, GBPJPY remains capped by the bearish trend line from YTD highs and the 153.39 level. With MACD and RSI bullish, there is still room for a move higher here with a breakout above the 153.39 level turning focus to the 156.66 level next. To the downside, a break below the 151.36 level will put the focus on deeper support at the 149.39 level.