Bank of England rate preview: inflation report brings fresh economic forecasts

When and where?

The Bank of England (BoE) will conclude their latest virtual monetary policy meeting at midday, on Thursday 6 August 2020.

Will we see any change to monetary policy?

The Monentary Policy Committee (MPC) are unlikely to make any change to their current monetary policy stance, with the £100 billion rise in asset purchases seen at the last meeting (in June) ensuring that we are expecting to see quantitative easing (QE) stay steady this time around. From an interest rate standpoint, markets pricing points to a 97% chance that we will see the BoE keep the bank rate steady at 0.1%.

Commentary will be key

Monetary policy has seemingly taken a breather over the past month, with the likes of the US Federal Reserve (Fed) and Royal Bank of Australia (RBA) highlighting how central bankers appear to be holding off until we have a better idea of where this economic rebound ends. From a US perspective, the potential for a major fiscal withdrawal raises major questions that the Fed will be keenly following.

Meanwhile, the BoE will be aware of the potential implications that come with the withdrawal of the furlough scheme that is currently set to end in October. The QE programme is likely to remain in place for some time, yet we have seen Bailey speculate that the rate of purchases will slow over time. Thus traders will be keen to understand greater detail on the ongoing rate of asset purchases.

We have also seen a more open-minded approach from Bailey with regards to negative interest rates, following on Carney's flat-out refusal to consider such an option. As such, commentary around such a possible shift could provide a downside move for the pound.

BoE forecasts provide major focus

With the quarterly inflation report comes a host of economic forecasts from the bank. With few changes expected on the monetary policy front, there will be significant interest in the growth and inflation outlook as a guide of where we go from here. Bank forecasts are usually far from the mark at the best of times. However, while the ultimate accuracy of the forecasts are questionable, markets will be keen to see whether we are looking at a ‘V’ or tick shaped recovery.

Where now for the pound?

The pound has started turning lower this week, coming off the back of a sharp surge last week. That recent rise took the pair into a third touch of a descending trendline, set within a wider bearish trend. That points towards a potential trend reversal here for GBP/USD, with a rise through trendline resistance the first break required to signal a potential shift in sentiment. However, we will ultimately require a rise through the $1.3515 level to bring an end to this downtrend.

On the daily chart, the current reversal looks likely to bring about a fresh break back below the 80 threshold on the stochastic. While July provided a fake-out signal, the past eight months have brought three successful bearish signals upon seeing the stochastic drop through the 80 threshold. With that in mind, a bearish phase could come into play from here, where a breakdown in the stochastic provides us with a potential sell signal.