Looking at future expectations, it is interesting to note that despite the more hawkish verbal shift by the BoE, markets see a greater likeliness of a rate cut than hike in 2016. This will be a reflection of the fact that a recession would likely result in swift action from the committee, whereas continued improvement would have less of an immediate impact to policy.
Given the current dovish positioning of markets relative to actual BoE commentary, it makes sense that we could see those relative probabilities change should Carney come out with something a little more bullish regarding the UK economy. Whether he will do is another matter for contention.
The problem for the BoE is that the UK is confronted with a number of hurdles, with the June EU referendum representing the most notable roadblock to any near-term shift in monetary policy. Tomorrow sees the announcement of both an updated UK budget alongside new economic and fiscal estimates from the OBR. This is likely to be referenced by the BoE on Thursday and as such, Wednesday’s events will have a significant impact upon the perceived sentiment around Thursday’s BoE meeting. Given the expected shift towards further cuts from George Osborne, as a reflection of a slowing economy, it would be difficult to foresee anything too bullish from Mark Carney.
We have today seen sterling take a large hit ahead of a big week for the UK economy. GBP/USD in particular is looking highly likely to revert back to the bearish trend that has dominated since it peaked out in mid-2014. On the four-hour chart below, we can see a clear bearish break from the channel pattern which has confined trade throughout March so far. Having broken below both $1.4254 and $1.4168, there is a long way to go for the pair to regain any bullish momentum. However, a closed four-hour candle below $1.4122 could be the most significant sign that we are back on the bearish pathway back towards the February low of $1.3836.
With the FOMC, UK budget and BoE in the coming two days, this chart will change significantly. Yet initial signs are pointing towards possibly setting up for yet another leg lower.