It has been on a bumpy road since the beginning of the week as investors reacted to various events ranging from the latest progress made on the Brexit bill, accelerating inflation pressure to stalling wage growth. The pound sterling hit 1.3329 on Wednesday up more than 1% since Friday’s close. Nevertheless, the cable quickly reversed gains to return at around 1.32 as traders scale back their bullish GBP bet ahead of today BoE meeting.
The Bank of England is facing a difficult situation where it is facing an acceleration of inflation pressures together with the prospect of a slowdown of the economy, which could be significant should the negotiations with the European Union be harsh. Against the backdrop a potential significant slowdown, the BoE will have no choice but to tolerate temporarily an overshooting of its inflation target in order to avoid suffocating the economy.
As the monetary institution won’t update its inflation and growth forecast this time (one has to wait the November meeting), the question is rather how many MPs will switch sides and join the hawks. GBP/USD is trading sideways ahead of the interest rate decision. Given the sharp appreciation of the pound over the last few days, we think that the risk is skewed to the downside with a possible retracement towards the $1.30 level.
By Arnaud Masset