Super Thursday sent out the doves, as the BoE seemed to target sterling devaluation like never before. The decision to include reference to the possibility of easing – as well as tightening – was no doubt deliberate, as the BoE aims to ease sterling given the drag a strong pound has upon inflation expectations.
With the inflation report mentioning ‘sterling’ 88 times, there is no doubt the resulting 1% drop in GBP/USD was to some extent manufactured. Downgraded inflation expectations and a worsened growth outlook for global growth portray a wider economic environment which is moving in the wrong direction. However, with earnings growing by 3%, retail sales rising by the greatest amount since 2013 and unemployment at a seven year low, the BoE’s domestic excuses are gradually dropping out of the picture.
Despite the denial that the BoE are not waiting for the FOMC to act first, it is highly likely that there will be a notable gap between the two banks raising rates given the effect it could have upon financial markets. Certainly Yellen has struck a more willing tone when it comes to a near-term rate rise, and thus the likely outcome is a Q1 2016 rise from the Fed followed by a Q2 move from the BoE.
Leading into tomorrow’s US jobs report, markets will be desperate to gauge better whether Yellen will manage to implement the rate rise she seeks. There is a clear bias against hiking, given that tomorrow’s data will not be able to confirm a rate rise in December, but could certainly take it off the table should data go the wrong way. Markets currently factor in a 56% chance of the Fed hiking in December; a number which is sure to change drastically off the back of tomorrow’s jobs data.