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Super Thursday – BoE’s time to taper?

May 06,2021 06:54:26

Overnight Headlines

*USD eased as US economic data came in softer than expected

*US equities closed mostly higher, tech lagged, Europe outperformed

*China halts Australia economic dialogue in latest retaliation

USD had a narrow range day consolidating again below the 50% retrace level of this year’s high to low move which stands near the mid-March lows around 91.32. More hawkish members of the Fed downplayed the risk of excess inflation and the need to taper in another signal that is it too early to change monetary policy.

US equities were supported overall by gains in energy and other cyclical shares, pushing the Dow to all-time highs. The 30-stock benchmark also set a new intraday record as value stretched its streak of outperforming growth to seven days.

Market Thoughts – UK in focus

It’s being dubbed ‘super Thursday’ in the UK with local and Scottish elections getting some attention. The latter is being touted as a market mover and a trigger of some GBP volatility, as it could have significant implications for the chances of another Scottish independence referendum and the potential break-up of the UK. But regardless of the result, any vote is most likely a few years away so even if there are some negative headlines, it shouldn’t be overly impactful on sterling.

The most important event is the Bank of England meeting at noon BST. An upbeat monetary policy report is expected but the market is split over whether the bank will announce a tapering of QE. Recent MPC speak has not pointed to any immediate change in the bond buying program though a “mechanical” tapering will happen in order to allow purchases to run until the end of the year. New forecasts are set to see an upgrade to 2021 growth forecasts with little change to inflation projections. The successful vaccine rollout and fiscal stimulus from the recent budget will be likely reflected in a lower peak in unemployment.

The BoE rarely changes the pace of its QE bond buying but a reduction now will be consistent with the more optimistic forecasts expected. On the flip side, inflation is still stuck at just over half the bank’s target of 2% and the MPC may want to see more economic data with the UK lifting more restrictions in mid-May. Over to you, Governor Bailey…

Chart of the Day – GBP poised…

It’s all about managing the exit for the BoE today and any sense that the hawks are winning the argument will push sterling higher. That said, it seems like expectations are for a more hawkish tilt already so any disappointment would see more volatility to the downside.

GBP/USD has moved in a range since March and sideways this week, effectively waiting for today’s main event and the dollar failing to push higher. The pair has traded around the 50-day SMA for the past couple of weeks with the recent highs around 1.40 capping the upside. If the market’s suspicions are right, then the pair will try again to break higher. Support comes in at the recent weekly lows around 1.38 if the bank is more cautious.

Jamie DuttaAnalyst / Trader

"With extensive experience as a full time trader and financial market commentator, I have worked as a trader in top tier investment banks and trading houses, including Morgan Stanley and GAIN Capital trading Forex, Index derivatives. and Bonds. I combine technical analysis with a deep fundamental knowledge to identify trade set-ups. My real life experience allows me to break down the complexities of financial jargon and trading. This means everyone can better understand the compelling forces of greed and fear which are realised every day in countless ways across markets."

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