MUFG: UK labour report and US CPI could impact BOE hiking path and GBP

MUFG discusses the high possibility that this week’s UK labor report and the US CPI data could influence market expectations surrounding the Bank of England’s (BoE) rate hike. Recent statements from Governor Andrew Bailey and Chief Economist Huw Pill hint at a more dovish stance, which may affect the GBP’s performance in the short term.

Key Points:

• Shifting Rhetoric: Governor Bailey and Chief Economist Huw Pill have recently made comments that suggest a more dovish communication strategy from the BoE, with Bailey even suggesting that the UK might be close to the peak in its rate-hiking cycle.

• OIS Market Reaction: The Overnight Index Swap (OIS) market has adjusted its pricing, and a rate hike is no longer fully priced in for this month.

• Data Watch: A weaker UK jobs report and a moderate US CPI print could further lower market expectations of a BoE rate hike, impacting the GBP negatively in the short term.

Trading Recommendations:

• GBP Positions: Traders should consider a cautious stance on the GBP, especially if upcoming key data weakens the market’s conviction on a rate hike.

• Data Sensitivity: Keep a close eye on the UK labor report and US CPI data. These could serve as crucial market movers for the GBP and rate hike expectations.

Implications:

For Traders:

• Rate Hike Uncertainty: The BoE’s rate hike path now appears more uncertain, making it essential for traders to closely follow upcoming data releases and BoE communications.

• GBP Volatility: Given the unsettled nature of the rate hike expectations, traders should be prepared for increased short-term volatility in the GBP.

For Policymakers:

• Communication Strategy: How the BoE communicates its policy intentions will be crucial for setting market expectations and could have significant implications for the currency.

Conclusion:

MUFG anticipates that this week’s UK labor report and US CPI data could be pivotal in determining the BoE’s next move and the short-term performance of the GBP. The change in tone from the BoE’s top officials and upcoming key economic reports could very well shift market expectations, making it an uncertain period for the GBP. Traders should remain vigilant and adapt their strategies accordingly.

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