The chances of a rate cut from the BOE are on a knife’s edge at the moment, so the usual barrage of UK data this week could have a major impact on the markets. Cable has been riding a post-election high, with markets expecting slightly more persistent inflationary pressures would slow the BOE’s rate easing cycle in the future.
But with the release of CPI figures tomorrow, followed up by crucial jobs numbers the day after, the market’s focus will be brought back to the immediate potential monetary policy changes. Signs that inflation is getting more under control would likely bring cable’s upswing to an end. But if there has been some signs that inflation is already entrenched, then the markets could keep boosting the pound.
Hanging in the Balance
Markets are pricing in around a 50% chance of a rate cut at the next BOE meeting, meaning the upward and downward expectations from monetary policy are pretty much balanced. So, a slight shift in rate cut expectations, either moving it off to September or feeling more confident that it will happen now in August, could really rattle the markets. Though, the next meeting isn’t until August 20th, which means there is still another round of inflation data to shape MPC member opinions. That means that the inflation data likely isn’t going to definitively confirm market expectations, but it will likely be heavily influential.
Afterall, markets appear to be looking further ahead, considering that the strong economic growth that the country has already registered so far this year might keep rates higher. Economists say that last year’s technical recession is definitely over, but faster economic growth usually comes with higher inflation. That could put a crimp on expectations that the BOE will keep cutting once it starts down the easing path. Particularly with the new government expected to look for as many opportunities as possible to increase spending.
Back to the Here and Now
While inflation has been coming down, what has kept the BOE from easing is general tightness in the labor market. Something that could also persist with a rebounding economy. But with average earnings coming down as well as inflation, it might just be the opportunity for the BOE to ease up a little bit. With the market broadly expecting slower inflation, the jobs numbers, particularly if they confirm a loosening in the market, could be just as relevant.
First to come out though, is June CPI, which is expected to remain unchanged at 2.0% and match the BOE’s target. The core rate, on the other hand, is expected to be well above target at 3.5%. But that’s also expected to be unchanged from the prior month. The “pause” in the inflation data is likely to push the market reaction off until the jobs data.
The Potential Market Moves
The “freshest” employment data is the claimant count number, which is the number of people seeking support after losing their jobs. Therefore, the lower the number, the more positive it is for the pound, and vice versa. The claimant count is expected to drop to 20K from the surprisingly high 50.4K reported last month.
The unemployment rate is expected to be unchanged at 4.4%, with average hourly earnings expected to slow to 5.6% from 5.9% prior. This would likely indicate continued loosening of the labor market, and make the case for an impending rate cut.
