The BOE rate decision later is pretty much a coin flip
There is no trying to work around the situation for the BOE going into today's decision. It is either we are going to see a 25 bps rate cut today or perhaps one before the first half of the year is over and done with.
Despite some positive signals from post-election data, the BOE risks falling into the inflation trap and that is something that policymakers will no doubt seek to avoid sooner rather than later - or before it is too late to act.
So, what are the key scenarios we can expect from the BOE today?
A dovish cut
The votes should be at least a 7-2 in this scenario but the dovish part of the decision will stem from how the central bank communicates the outlook moving forward.
If they continue to see weaker inflation pressures and warn that there is a potential for more than one rate cut this year, this will lead to a drop in the pound as markets start to price in potential future action by the BOE considering the softer inflation outlook.
Add to the fact that the BOE is likely to reaffirm that Brexit risks have eased slightly and economic sentiment has improved a little - but there are still risks to the outlook - markets will keep the focus on the change in forward guidance as such.
In such a scenario, I reckon we could easily see cable be marked down lower towards 1.2850 and potentially 1.2800 as well.
A balanced cut
The votes should be around a 5-4 or 6-3 in this scenario and the rest will come down to the details of the decision instead.
The most important will be whether or not the BOE hints that this is a one-and-done scenario, or there is scope for more rate cuts down the road. They could also play it a bit coy by mentioning data dependency i.e. wait and see mode before responding.
The mixed voting picture should also offer some uncertainty over whether or not there will be any further rate cuts - a positive development for the pound.
Then, we will have to try and gauge how the BOE communicates on the UK economic outlook but I reckon it'll be more or less the same i.e. uncertainty still present, inflation tepid, but there are some improvements to economic sentiment post-election.
Depending on the details here, I reckon we could see cable price action center around 1.2900 to 1.3100 as the dust settles later today.
A balanced hold
The votes should be a 4-5 or 3-6 in this scenario and once much like the above, it will come down to the details of the decision.
In this instance, the BOE could either keep the language from the last meeting or shift the rates guidance to something more realistic i.e. hinting at a possible cut instead.
For some context, their current guidance still alludes to "gradual tightening" as seen below:
Further ahead, provided these risks do not materialise and the economy recovers broadly in line with the MPC's latest projections, some modest tightening of policy, at a gradual pace and to a limited extent, may be needed to maintain inflation sustainably at the target.
I reckon the bias in this scenario is for the pound to gain as markets respond to the initial decision but the details will determine how far the gains can go. If the BOE does give out some hints that a rate cut will come, that should keep gains in-check.
However, any major downside in the pound is unlikely with markets already having almost fully priced in a 25 bps rate cut by the May meeting.
In such a scenario, I reckon we could see cable move towards 1.3150 to 1.3200 in response.
A no-change hold
The votes should be a 2-7 in this scenario, reflecting a similar stance voting stance in December and the details of the statement will be kept largely unchanged.
If the rates guidance remains similar and the BOE spins the economic outlook to be a tad bit more positive, that could really give the pound some wings to fly in the aftermath of the decision later today.
It will all depend on whether or not there are any signals for potential rate cuts but if the BOE avoids to answer that at all costs, there is scope for the pound to gain strongly.
I reckon we could see cable back up towards 1.3200 initially before chasing further gains down the road, potentially moving towards 1.3300 to 1.3400 depending on the dollar side of the equation as well as incoming UK data.
The risk here though is that the BOE may fall into the inflation trap and would have to admit to a policy misstep. Hence, I would view this scenario as unlikely but if it does happen, any solid pound rallies may have to be a bit careful not to overstep.
