What's in store for the Bank of England?

Now that we have the monthly purchasing managers index (PMI) readings out of the way, we can look forward to the Bank of England (BoE) meeting and the quarterly inflation report (QIR) that comes out along with it.

This meeting takes place in the wake of the latest push higher for the pound, especially against the US dollar. A 5.6% gain against the US dollar was not something many had been expecting, even given the surge against the greenback witnessed since the lows of October 2016.

With sentiment towards the pound now quite bullish, as noted by net long positions on the currency at the highest levels since 2014, there might not be much room in the short term for further gains. However, when compared with positioning in 2014, there is still scope for further upside in the longer term.

The recent rally in GBP/USD means that the BoE has less pressure to act; the stronger currency tends to reduce imported inflation, just as the weaker pound boosted it in the aftermath of the Brexit vote. Arguably, the currency now looks to be at risk from a more dovish BoE, especially if growth and inflation estimates are downgraded in the QIR at the same time.

GBP/USD’s dip into late December found buyers, and the surge took the pair to its highest level since 2016. However, gains stalled around $1.43, with $1.4345 marking the upside limit. Below $1.3943, the price could see a wider retracement to $1.3613. The next upside target would be marked at $1.4668, should the pair manage to clear $1.4345.