When

Thursday 17th September

Growing risks

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The Bank of England are not expected to adjust monetary policy this month. With interest rates at historically low levels of 0.1% and £100,00 additional monetary stimulus added in June, this considered sufficient ammunition for now.

Instead this meeting is likely to be more about what is set to come. This list of challenges that the BoE appears to be growing almost by the day as the UK economy attempts to recover from the covid crisis and faces the end of the transition period – with or without a trade deal.

Whilst leaving without a trade deal will be the most disruptive option, even leaving with a trade deal could see some negative impact on the UK economy.

The Chancellors job retention scheme also concludes next month. Labour market data this week already shows the strains building and that is with 5 million people still on furlough. The unemployment rate is only at 4.2% currently as the furlough scheme masks the reality but that is set to climb to around 7.5% over the coming months. Although this number could increase under a no trade deal exit from the transition period

Inflation is sitting at a 4 year low increasing just +0.2% yoy in August owing to Rishi Sunak’s Eat Out to Help Out Scheme and contracting air fares.

What to expect

Given the how the situation is expected to deteriorate over the coming months, the BoE could acknowledge downside risks are growing. This seems likely given the cautious tone adopted by BoE policymakers lately and could weigh on demand for sterling.

Additionally, stimulus in November is looking increasingly certain, the question is which tools will the BoE be pulling out of the toolbox? We know that BoE Governor Andrew Bailey considers QE more useful.

Finally, the discussion surrounding negative rates is set to continue. The BoE has been evaluating the pros and cons of negative rates for some time and still appears to be on the fence. The markets will be watching to see whether negative rates are moving closer to becoming a reality given the rising headwinds that the UK economy is facing. Any hints that negative rates are coming could drag on the Pound and the financial sector.

EUR/GBP

The pair is trading -0.5% as rare Brexit optimism is giving GBP a boost. The pair still trades comfortably above its 50, 100 and 200 sma on the 4 hour chart and above its ascending trendline, suggesting more upside could be on the cards. A break through the 50 sma could bring into question the current near term trend

Immediate support can be seen at 0.9120 (50 sma), prior to 0.9070 (horizontal support). On the upside resistance at 0.91 (today’s high).

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