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BoE preview: mixed data pushes focus onto inflation and growth forecasts

A month of mixed economic data has ramped up the importance of this month’s inflation report economic forecasts.

The Bank of England (BoE) is back in focus this week, with governor Mark Carney leading the Monetary Policy Committee (MPC) into their latest rate decision, which will be released at midday on Thursday.

The March rate decision saw very little change from the bank, with the impending withdrawal from the EU driving a significant amount of risk-off at that time. We have now seen a substantial easing in those Brexit pressures, with the exit now delayed until 31 October.

On the economic front, we have seen improvements across the likes of the construction purchasing managers index (PMI), manufacturing PMI, manufacturing production and retail sales. This has been counterbalanced by weakness in a number of crucial indicators, with the services PMI falling into contraction, UK claimants rising by the highest amount in almost a year and inflation remaining at the lowest level in over a year.

This points towards a mixed message for the MPC members, with expectations of a gradually more hawkish stance likely to be reliant upon some of those key data points improving. The meeting sees another inflation report take place, meaning that we are set for another batch of data points, which will help guide market expectations for BoE action and the UK economy. The hawkish stance that took shape over the past year is likely to have been a reflection of the rising inflation that saw consumer price index (CPI) push past 3% at a point. However, with that number falling back below 2%, there is good reason to believe that the hawkish pressure will only return once we start to see that trajectory reverse in the opposition direction. The inflation projections released on Thursday will therefore be key in determining expectations from the market.

Many market analysts are looking for a hawkish tone from the BoE, yet with the Brexit clouds still looming overhead until October, it is going to be the case that Carney and co. look towards the data to guide what their decision is beyond that point. The fact is that the MPC will need to hold off until some form of breakthrough is found on the Brexit issue. That is likely to come in October. With that in mind, markets will be reacting to shifts in tone and outlook, with little chance of any actual change in policy. That goes a long way to highlighting the lack of volatility seen in the pound of late. Looking at the GBP/USD chart, we can see a bullish break through trendline resistance, pointing towards further upside. The does look like another retracement within the recent downtrend.

However, should we see a break through the $1.3133 swing high, there is likely to be a wider bullish change coming into play. Thursday certainly has the chance of sparking that move, with a more hawkish tone, or upward shift in inflation and growth estimates bringing about such a move. Until then, watch out for how the pair reacts to the 76.4% Fibonacci resistance level at $1.307.

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