This week has been traded amid tunes of profit-taking post French elections. While the outcome has been extremely euro positive, the common currency has been under pressure after gaining heading to the second round on Sunday. GBP is another European currency that has been doing great. In this analysis we discuss the outlook ahead of the key BoE meeting tomorrow and propose potential trading opportunities.
The Bank of England meeting is very important because a quarterly inflation projections will be released along the decision and minutes. It is obvious for market participants that no change is going to be introduced but discussion in minutes and economic projections will indicate if and when the Bank could increase interest rates.
Inflation in UK has rebounded as the BoE expected. Source: Macrobond, XTB Research
Let’s start with the economic picture. Inflation has increased as the Bank expected in response to higher oil prices (in year to year terms) and weaker currency. However, the latest core inflation print has been on the soft side.
UK business surveys have improved and the BoE could highlight this. Source: Macrobond, XTB Research
Business surveys have been encouraging on balance, showing a healthy improvement following a period of deterioration. It seems that recovery in Europe has positive effects on the UK economy.
Domestic demand could be a concerns for the BoE, although the latest CBI was a positive surprise. Source: Macrobond, XTB Research
Domestic demand has softened but the latest CBI indicator has showed a revival. Therefore on the net basis the economy has improved since February when the last projections was released.
However, the pound has gained a lot, too and it hasn’t really been related to the UK economy but instead to prospects of snap elections that could strengthen UK position in Brexit talks (at least this is the market interpretation). When one looks at the bond market, we could see higher gilt rates but this growth has not outpaced changes in other markets. Therefore the spread has been rather stagnant and does not seem to support the latest GBPUSD rally.
Therefore the BoE meeting and projections is a two-way risk for the pound. President Carney may notice economic improvement but he could also attempt to cool down GBP appreciation.
Trading-wise the most persistent trend of GBP appreciation could be spotted on GBPJPY. A pullback to around 146.70 could provide a decent entry assuming some bullish candle signals in this area.
GBPJPY could be the most interesting pair for GBP bulls as the trend is persistent. Source: xStation5
If the BoE is cautious, investors could consider going EURGBP long. The pair is close to a strong support zone starting from 0.8350 and this could be an opportunity for bulls. As we have noticed the GBP could be a bit oversold while weaker euro is merely a result of profit taking. Euro fundamentals look strong and markets could soon start anticipating more hawkish tone at the ECB meeting in June.
Cautious Bank of England could make a EURGBP long an interesting trade. Source: xStation5