The Bank of England will announce its latest policy decision on Thursday at 1100 GMT and is widely anticipated to hold rates at 0.75%. Ahead of the BoE’s announcement, retail sales numbers for May will be watched at 0830 GMT. But with recent remarks by BoE policymakers reaffirming the Bank’s tightening bias, the June meeting could well end up being a non-event as there will be no press conference for reporters to quiz Governor Mark Carney on the Bank’s stance. This could leave investors seeking direction from UK politics where the Conservative party is in the process of selecting Theresa May’s replacement as the next British prime minister.
BoE not backing down on rate hike guidance
The UK’s central bank has raised rates twice since the financial crisis – not as many as the US Federal Reserve and Bank of Canada have been able to deliver but it still gives the BoE more ammunition than the European Central Bank and Bank of Japan to respond to a downturn. The limited room for cuts may be one of the reasons why the Bank is keen to resume its rate hike cycle and is sticking to its tightening bias even as other major central banks around the world make a dramatic about-face on policy towards easing.
Several MPC members, including Carney, have indicated over the past couple of weeks that interest rates will need to rise if the UK economy performs as expected. The Bank will probably stick to the script on Thursday and reiterate that rates will need to be lifted “at a gradual pace and to a limited extent”. However, with growth appearing to stutter in the second quarter and overseas risks sharply increasing amid a worsening trade war and a possible conflict in the Middle East, investors are not convinced by the Bank’s forward guidance.
UK growth is slowing; retail sales to fall in May
UK economic data deteriorated at a frightening pace in April as manufacturing output was sharply scaled back following a boost from stockpiling in February and March in preparation of a possible disorderly Brexit on the original leave date of March 29. More significantly, the dominant services sector, which suffered in March from the Brexit turmoil, failed to bounce back in April and the May PMIs were also weak, suggesting the slowdown is spreading to all sectors of the economy. This puts the spotlight on Thursday’s retail sales readings as UK consumers have so far been resilient to the political chaos in Westminster.
Retail sales are forecast to have declined by 0.5% month-on-month in May after flat growth in April. The annual rate stood at a healthy 5.2% in April but could moderate to 2.7% in May if the monthly change comes in as expected.
Pound halts losses; Tory leadership contest eyed
The pound, which yesterday halted a week-long decline, could slip back towards the May low of $1.2557 if the retail sales numbers disappoint, while a drop below this level would risk a breach of the 2019 trough of $1.2504 touched on Tuesday. However, a surprise rise in retail sales, combined with a hawkish-sounding BoE statement could see sterling challenging the 61.8% Fibonacci retracement of the May-June upleg at $1.2635.
But with Conservative MPs due to decide this week on who will be the remaining two candidates that will make it to the final ballot that will be voted on by party members, there’s a good chance traders will ignore the data and the BoE decision and instead focus on the outcome of these ballots.
Tuesday’s ballot saw current frontrunner Boris Johnson extend his lead and former Brexit Secretary Dominic Raab being eliminated from the race. There will be further ballots on Wednesday (1700 GMT) and Thursday (1200 GMT) and unless someone drops out of the race, a second ballot will be held on Thursday at 1700 GMT to decide who will join Johnson (as predicted) to the final vote on July 22.
Until then, the pound could extend its technical rebound on the back of Johnson’s slight softening of his no-deal Brexit threat, while a more dovish Fed could also lend support to cable.