(08 FEBRUARY 2018)DAILY MARKET BRIEF 1:Super Thursday: BoE to raise its forecast

The UK economy is doing fine. According to the first estimates, the economy grew by 1.5%y/y in the last quarter (beating estimates of 1.4%), which indicates that the UK also benefited from the acceleration of the global economy, together with a little help from a weaker pound sterling. The labour market remained strong with the ILO unemployment rate stabilising at 4.3%. Finally, inflation remains on a solid footing with the core measure stabilising at 2.5%y/y in December.

Against such a backdrop, the Bank of England will have no choice but to revise to the upside its forecast for both economic growth and inflation. Investors have already started to adjust their tightening expectation. The market is not expecting an increase of borrowing rates as soon as May (51% chance of a rate hike according to probabilities extracted from overnight index swap).

However, according to the option market, investors are a bit nervous ahead of the BoE decision. Implied volatilities – for most maturities – have increased, while the 25-delta risk reversal measure moved further in negative territory. All this suggests that investors are also considering that the BoE could stay on the back foot by remaining extremely cautious in its communication.

GBP/USD is currently trading at around 1.3850, down 0.20% on the day. The first resistance area lies at around 1.4290 (high from last Friday), while a stronger one can be found at 1.4345 (high from January 25th). On the downside, a support stands at around 1.3655 (previous high from September 20th and lows from mid-January).

By Arnaud Masset