British pause in interest rate hikes, Pound may down
Based on two key economic indicators, wage growth and inflation, both have exhibited stubbornness, and the Bank of England is preparing to halt its planned rate hike scheduled for this Thursday.
In fact, both wage growth and service sector inflation, the two critical indicators guiding the Bank of England's policy decisions, have exceeded market expectations from August. Additionally, CPI data is set to be released the day before the meeting, with a slight increase in service sector inflation anticipated once again.
Investor expectations for a rate hike by the Bank of England have diminished, and it is possible that the Bank will not raise interest rates on Thursday. Significant changes have occurred since the latter half of the year. At that time, the market was pricing in four additional rate hikes, in addition to the one in August. Now, it's less than two hikes, and investors are considering the possibility of a pause by the Bank of England on Thursday. Moreover, policymakers at the Bank of England will closely monitor the Federal Reserve, which has successfully delayed rate cut expectations through its so-called "dot plot" strategy, extending its rate hike cycle by pausing every two meetings. Similar strategies may lead investors to believe that the Bank of England could pause in September and strongly hint at the possibility of another rate hike in November during the meeting.
However, upcoming data such as service sector CPI, service sector inflation, and wage growth will influence whether the Bank decides to conclude its rate hike cycle this week and when it might cut rates.
Another decision the Bank of England will make this week is whether to accelerate quantitative tightening over the next 12 months. The stock of UK government bonds maturing within the next year is about £10 billion higher than last year. The Bank has also cleaned up its corporate bond holdings over the past year, indicating that it may increase the sale of UK government bonds over the next 12 months to reduce its government bond holdings.
In summary, the British Pound has performed reasonably well this year, with an overall increase of over 5% since the beginning of the year, although it dipped about 4% from its peak in July. The recent softening of the Pound in recent months can be attributed in large part to the repricing of the Bank of England's terminal rate from near 6.50% to the 5.60% range. If the Bank of England pauses its rate hikes, there is a significant possibility that the GBP/USD exchange rate could drop below the May low, just slightly above 1.2300. However, an expected 25 basis point rate hike by the Bank of England on Thursday, accompanied by some hawkish rhetoric, is unlikely to significantly alter the trajectory of the Pound.
Interestingly, Eurozone confidence index data is also very poor, and the European Central Bank has indicated that the tightening cycle has come to an end. Nevertheless, the Pound's performance lags behind the Euro. If the rate hike is paused, there is a greater downside risk to UK interest rate expectations, which should put pressure on the Pound.
In fact, both wage growth and service sector inflation, the two critical indicators guiding the Bank of England's policy decisions, have exceeded market expectations from August. Additionally, CPI data is set to be released the day before the meeting, with a slight increase in service sector inflation anticipated once again.
Investor expectations for a rate hike by the Bank of England have diminished, and it is possible that the Bank will not raise interest rates on Thursday. Significant changes have occurred since the latter half of the year. At that time, the market was pricing in four additional rate hikes, in addition to the one in August. Now, it's less than two hikes, and investors are considering the possibility of a pause by the Bank of England on Thursday. Moreover, policymakers at the Bank of England will closely monitor the Federal Reserve, which has successfully delayed rate cut expectations through its so-called "dot plot" strategy, extending its rate hike cycle by pausing every two meetings. Similar strategies may lead investors to believe that the Bank of England could pause in September and strongly hint at the possibility of another rate hike in November during the meeting.
However, upcoming data such as service sector CPI, service sector inflation, and wage growth will influence whether the Bank decides to conclude its rate hike cycle this week and when it might cut rates.
Another decision the Bank of England will make this week is whether to accelerate quantitative tightening over the next 12 months. The stock of UK government bonds maturing within the next year is about £10 billion higher than last year. The Bank has also cleaned up its corporate bond holdings over the past year, indicating that it may increase the sale of UK government bonds over the next 12 months to reduce its government bond holdings.
In summary, the British Pound has performed reasonably well this year, with an overall increase of over 5% since the beginning of the year, although it dipped about 4% from its peak in July. The recent softening of the Pound in recent months can be attributed in large part to the repricing of the Bank of England's terminal rate from near 6.50% to the 5.60% range. If the Bank of England pauses its rate hikes, there is a significant possibility that the GBP/USD exchange rate could drop below the May low, just slightly above 1.2300. However, an expected 25 basis point rate hike by the Bank of England on Thursday, accompanied by some hawkish rhetoric, is unlikely to significantly alter the trajectory of the Pound.
Interestingly, Eurozone confidence index data is also very poor, and the European Central Bank has indicated that the tightening cycle has come to an end. Nevertheless, the Pound's performance lags behind the Euro. If the rate hike is paused, there is a greater downside risk to UK interest rate expectations, which should put pressure on the Pound.