Expect High Volatility with these very important data releases

Event – Bank of England Interest Rate Decision

Time – Noon London time – 3rd Aug 2023

Importance – Very High
Implied Volatility – High
Certainty surrounding the economic release – Moderate to low.

Today at mid-day the Bank of England (BOE) will release its interest rate decision for July, with the market widely expecting the Central Bank to hike rates by 0.25% to 5.25%. This will be followed by a press conference led by the BOE Governor Andrew Bailey, where Bailey will give the market a further insight into the bank’s thinking on future interest rate path, the wider economy and take questions from journalists.

Sterling has rallied against both the Dollar and Euro from March of this year – hitting its highs in both cases around mid-July. From March this year, the Pound had rallied versus the Dollar some 11%, from 1.18-1.31 and versus the Euro some 5% – from 0.89-0.85.

There have been two principle drivers of this –

1. The Dollar weakened across the board and

2. The Pound strengthened as the UK yield curve began to price in more and more interest rate hikes.

The UK was demonstrating persistently high levels of inflation and activity data was slowing down in March and April. This was leading to a potential environment of ‘’stagflation’’ – a high inflationary environment with little growth. This in the longer term of course is not good for a currency, however the immediate effects was for the markets to price in more and more interest rate rises by the Central Bank, in order to fight inflation in the UK – which drove the currency higher from March to July – one of the major drivers of any currency pair in the FX markets is the interest differentials between the currencies.

Less than 2 weeks ago we had close to 0.5% priced in for this BOE meeting, however in the interim period a lot has changed globally. We have had a dovish ECB and a Fed that is coming to the end of its rate hiking cycle. We have had a real slow down in global economic activity indicators and the markets are once again pricing the possibility of a recession. This has led a lot of market participants to question the number of interest rate hikes priced into the UK and whether the BOE would be less aggressive on its interest rate path. Hence the market has gone from pricing in 0.50% increase at this meeting to a 0.25% increase.

From a currency perspective, we go into todays data release with Sterling trading off its recent highs seen in mid-July, as the markets price out more and more interest rate hikes in the UK – this is most evident versus the Dollar.

GBP/USD – As can be seen from the GBP/USD chart below – The pound has sold off versus the Dollar by 3.5% since mid-July, as more and more bps were priced out of the UK interest rate curve. We broke significant trendline support on Tuesday that come in at 1.2750-40 level, dating back to May of this year. A weekly close below this level should see further downside momentum.

EUR/GBP has been less affected by this move in UK interest rate expectations, as we also had a dovish ECB only last Thursday, so the affects versus the Euro has been somewhat diluted – with Sterling only selling off versus the Euro by 1% – see chart below.

Let’s keep this very simple – we feel, like the market, that the Bank of England only raises rates by 0.25% today. Bailey’s press conference post decision is where it may get interesting though. If he portrays a picture of the bank easing off the gas and potentially even looking to pause at the next meeting and allowing current interest rate hikes to feed into the economy – we could see a further significant sell off in Sterling.

However if Bailey does not deliver a dovish message and suggests the BOE will continue on hiking to curb inflation we could well see a full reversal of the current Sterling sell off –

All eyes on Bailey and his press conference later this afternoon.

Treasury First is powered by Assure Hedge (UK) Limited, a company incorporated in England and Wales (No.10723112) with its registered office at 45 Eagle Street, London WC1R 4FS, UK, is authorised and regulated by the Financial Conduct Authority of the UK (FRN:783837). Assure Hedge Limited, the parent company, is incorporated in Ireland (No. 578153) with its registered office at Dogpatch Labs, CHQ Building, North Wall Quay, Dublin 1, Ireland.

This email and any files transmitted with it are confidential and intended solely for the use of the individual or entity to whom it is addressed. If you have received this email in error, immediately notify the sender by reply email and then permanently delete this email and your reply. Unauthorised use, disclosure, storage or copying of this email is not permitted. Whilst every endeavour is taken to ensure that emails are free from viruses, no liability can be accepted for any damage arising from using this email. Treasury First does not guarantee the accuracy or reliability of information in this message, and any views expressed are not necessarily the views of the company.