BoE decision, potential Brexit vote, and key UK data to drive sterling – Forex News Preview

Marios Hadjikyriacos, XM Investment Research Desk

It will be an action-packed week for the British pound. The UK Parliament could vote on PM May’s deal for a third time, the Bank of England (BoE) will announce its decision on Thursday, while key economic data will be released throughout the week. As always, politics will probably dominate economics in driving sterling. While the ultimate destination for the currency may be higher from here, the absence of any clarity over what happens next in Brexit suggests that a correction lower shouldn’t be ruled out first.   

Important events will commence on Tuesday, when the UK employment data for January are released at 09:30 GMT. Forecasts point to an unchanged unemployment rate of 4.0%, but some moderation in wage growth. While average weekly earnings excluding bonuses are expected to have risen by 3.4% in yearly terms, the same pace as in December, the measure that includes bonus payments is projected to have cooled to 3.2%, from 3.4% previously.

On Brexit, the British Parliament is expected to vote on PM May’s deal again “in the coming days”. The date hasn’t been set yet, and at the time of writing it’s still uncertain whether this vote will take place at all. Chancellor Hammond said over the weekend the deal won’t return to Parliament unless Conservative Brexiteers and the DUP change their minds and support it.

If there is a vote, it will probably be on Tuesday or Wednesday, before the upcoming EU summit on Thursday. British lawmakers have already rejected this agreement twice, but in the unlikely event May somehow finds a way to command a majority this time, then the pound could soar as uncertainty finally starts to dissipate. In this case, the UK would then ask the EU for a short ‘technical’ extension until June.

However, if MPs stick to their guns and vote it down again, then a much longer delay of up to 2 years will likely be requested. While this could initially weigh on sterling as uncertainty remains elevated, such a lengthy delay may also raise the likelihood for another referendum in the eyes of investors, so it could prove a bullish outcome in the longer run as well.

Turning back to economic data, Wednesday will bring the release of inflation figures for February. Both the headline and the core rates are expected to have held firm at 1.8% and 1.9% respectively on a yearly basis, just below the BoE’s 2.0% target.

Alas, that’s unlikely to be much comfort to the central bank, which will announce its decision the following day at 12:00 GMT. No action is expected and since this will be one of the ‘less important’ gatherings without updated forecasts or a press conference, investors will focus entirely on the accompanying statement and meeting minutes. Admittedly, the BoE has its hands tied by Brexit uncertainties. Growth has slowed notably as investment was held back by such worries, but the Bank has not adopted a more cautious tone, instead opting to simply remain sidelined for now.

The reasoning is that an ‘orderly’ Brexit outcome can dispel much of the uncertainty by itself, and thus kickstart investment and growth without the BoE’s intervention. Overall, the Bank is unlikely to provide any strong signals at this meeting, but if there is any change in tone, it will most probably be towards a more cautious-sounding bias. This implies a modest downside risk for the pound on the decision.

A few hours ahead of the BoE meeting – at 09:30 GMT on Thursday – the nation’s retail sales for February are due out, though these will likely be overshadowed by the policy decision.

In the big picture, it’s becoming increasingly clear that the eventual destination for sterling will likely be higher from current levels. Parliament has consistently ruled out leaving without a deal, so the only other alternatives are leaving with a deal or not leaving the EU at all, both of which are positive for the pound. Therefore, the real question may be whether it will be just plain sailing higher from here, or whether the currency will first correct lower over the coming weeks, before the ultimate rally. On balance, the latter scenario seems more likely. At this stage, nobody knows what happens next, which implies that more ‘plot twists’ probably lie ahead before traders finally get the Brexit clarity required to push the pound higher. The risk is also that a no deal Brexit still happens by accident as a result of brinkmanship or a misunderstanding between the UK and the EU or a missed deadline, but this outcome could be so damaging to both the EU and the UK that pound bulls believe it will be avoided.

Taking a technical look at sterling/dollar, potential support to declines may be found near the 50-day simple moving average (SMA), currently at 1.3031. A downside break would open the way for a test of the 200-day SMA at 1.2981, before the March 11 low of 1.2945 comes into view.

On the other hand, resistance to advances could come at 1.3380, a zone which halted the rally on March 13. A bullish violation may see buyers challenge the 1.3470 area, defined by the June peak.