Traders in all things UK should get an early night tonight......

Wednesday 5th August 2015

Traders in all things UK should get an early night tonight......

 Ref : "It's Super Thursday at the Bank, and there's too much information" , The Times, p.39

It's going to be a big, big day tomorrow for anyone trading the Pound or Sterling assets. For the first time, an independent Bank of England is rolling up three key announcements into one. The decision on rates, the minutes of the meeting that led to that decision and the Quarterly Inflation Report will all be released. Throw in some Industrial and Manufacturing Production numbers, and analysts will have an avalanche of data to digest in double-quick time. B of E Governor Mark Carney maintains the new method of delivery improves "transparency and accountability"...... plainly, not all would agree.

 

But to address the three main areas :

 

There is no chance that the Bank will decide to raise rates from its historic low of 0.5%, where it has languished for 6/12 years

At the last meeting in May, the 9 members of the rate-setting committee voted unanimously to keep rates on hold. This time expectations are of a 7 - 2 split in favour of the status quo, though a 6 - 3 vote is possible and would be seen as hawkish, probably boosting Sterling and hurting Gilts etc (unless the third vote came from the outgoing David Miles).

 Since May's Inflation Report, oil has fallen by about 15% and Sterling has risen by 3.5%. This should at least offset the effect of rising wage pressures. Any reduction in inflation forecasts would reduce the need for rate rises and logically should pressure Sterling and help UK assets.

 Just as in the US, the question of raising rates is not one of whether, but when. B of E officials have been energetically letting the markets know of the likelihood of a rise AT SOME POINT for quite a while. This should not come as any surprise ..... the super-low base rate of 0.5% in place for so long was a response to the global crisis and the recession that followed. Whilst the UK still has hurdles to overcome, few would argue that it's not in a considerably stronger position now.

 In fact, one could argue that by many measures the UK should be ahead of the US in lifting rates. So why is the US almost certain to raise this year, whilst futures markets point to a UK move in May next year ? The answer is the level of Sterling. The Pound is at its highest trade-weighted value for 7 years, and in recent months has been the strongest of all the major currencies, even outstripping the mighty US Dollar. The UK is a more "open" economy than the States and a strong currency has even more of an effect, putting a dampener on growth (the UK already has severe trade-deficit problems) and on inflation.

 The last thing Governor Carney needs is Sterling continuing to fly, and he'll need to be very careful just what signals he sends tomorrow.