BoE Meeting Preview - 50bps or 25bps hike that is the question

It’s a big week in central bank land and the Old Lady on Threadneedle Street is gracing us with her presence. The market is pricing an outside chance of a 50bps hike with just shy of 35bps priced in for this meeting (circa 40%), which would mark the 5^th back to back hike. Since the bank gained independence in 1997 they’ve never moved up in that size step, so it would be a history making hike if it was to occur. The guidance doesn’t really give any firm clues given the flexible language used – “some degree of further tightening…might be appropriate”. Although UK GDP disappointed on Monday morning as test and trace activity is scaled back, I’d be surprised if this affects the psyche of the BoE given the tight labour market and robust inflation. Additionally, the announcement of a fiscal boost by the chancellor should provide the BoE with a bit of a buffer to continue tightening. Will other central banks influence the decision – ECB GC members calling for 50bps hikes and speculation that the Fed will pull the trigger for 75bps? Lastly, being one of the first central banks to move and front load its hikes might remove the need for a 50bps uplift. The decision can be distilled into a longer period of hikes vs larger sized hikes. The market is pricing in 200bps by December of this year, which means with 5 meetings left this year the market sees three 50bps hikes.

The more important aspect of this meeting is how the votes stack up. Will the 50bps camp from the previous meeting (Saunders, Haskel and Mann) maintain their views? If two MPC members were to dissent for no hike then we could be looking at a three-way split permutation. In that scenario, then the camp with the highest number of votes would win. So if Ramsden (voted for a 50bps move at a previous meeting) was to back a 50bps hike then the BoE would hike by that increment. If no one on the committee voted in favour of a hold then another two members would be required to switch to seal the deal for a 50bps hike. The doves could try to tactically vote for a 25bps hike as opposed to a hold in an attempt to lower the chances of a 50bps move. Thursday could be an interesting one for GBP assets.

GBPUSD:

Cable has breached the 13 May 2022 low at 1.215, bringing 1.20 into sight. The RSI isn’t extremely oversold, so there is room on that front. The Fed meeting on Wednesday evening will be a pivotal event for cable. The covid lows from March 2020 around 1.14 are not too far off.

EURGBP:

It’s breached a key psychological resistance level at 0.86 with the 50-day SMA crossing above the 200-day SMA. The RSI is nearing a crucial zone as previous price rallies ran out of steam around the 63.68 mark. 0.865 is the next major resistance zone. On the downside, 0.85 and 0.845 (200-day SMA and 50-day SMA).