UK Central Bank Trying to Appear Unbiased to Avoid Influencing Outcome
The Bank of England (BoE) has to appear unbiased on the very political topic of Britain exiting the European Union. The Leave campaign has on multiple occasions accused the central bank on taking a stance by calling the potential Brexit the “biggest domestic risk to financial stability”. Tomorrow’s Super Thursday, so named because of the number of documents to be published at the same time, will be focused on that risk and how does the BoE plan to deal with the outcome whatever it maybe.
The inflation report will be key as the currency has depreciated since the last forecast, while the price of energy has recovered thanks to oil producer willingness to freeze their output levels. The U.K. economy has slowed down to a near stall after the release of the service sector PMI was at a three year low in April. The market has already ruled out rate hikes from the BoE for at least 2 years given the state of the economy and the uncertainty on the outcome of the referendum. What the market will be looking at will be signs of a possible rate cut given the weaker economic results and rising uncertainties.
The BOE will issue its inflation report, monetary policy summary, the official bank rate and the minutes of the MPC on Thursday, May 12 at 7:00 am EDT. The British benchmark interest rate is not expected to change, while the focus will be on the inflation report’s language about the impact of Brexit and Governor Carney’s words on the same subject during his press conference.The GBP/USD has gained 0.22 percent in the last 24 hours ahead of another BoE’s Super Thursday. The currency is trading at 1.4464 after a volatile 30 days where U.S. President Obama supported the Stay campaign, while suddenly U.K. polls are starting to show a closer gap between Stay and Leave as the referendum enters its final 60 days before the actual vote. Economists for the most part have forecasted that if the Leave vote wins the British economy will shrink. The BoE has not been as clear on the actual costs, but in calling it the biggest risk to the U.K. economy it has shown the Leave outcome would result in a certain economic hit in the short term.
The International Monetary Fund (IMF) has softened their stance on Brexit this week. From a “severe damage” to be caused by Brexit on April in a speech by IMF chief Christine Lagarde, it now has downsized to a similar position to that of the BoE. IMF senior official Michaela Erbenova said that “a British decision to leave the EU could temporarily lead to uncertainties and volatilities on financial markets”.
Governor Carney and his staff face a difficult conundrum. Fulfill their duties by giving a best economic best on the impacts of known economic scenarios, but doing so without appearing to give out a recommendation that could have a political tone. The GBP has regained some strength on the back of higher profile support to the Stay camp, but the media and polls are showing the race is still too close to call which would keep the pound volatile until after a final outcome is known.
Forex Market events to watch this week:
Thursday, May 12
7:00 am GBP BOE Inflation Report
7:00 am GBP MPC Official Bank Rate Votes
7:00 am GBP Monetary Policy Summary
7:00 am GBP Official Bank Rate
7:45 am GBP BOE Gov Carney Speaks
8:30 am USD Unemployment Claims
6:45 pm NZD Retail Sales q/q
Friday, May 13
2:00 am EUR German Prelim GDP q/q
8:30 am USD Core Retail Sales m/m
8:30 am USD PPI m/m
8:30 am USD Retail Sales m/m
10:00am USD Prelim UoM Consumer Sentiment
*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar
About Alfonso Esparza
Senior Currency Strategist, OANDA, Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, he established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto. Follow on Twitterand on his Google+ profile.