To taper or not to taper? That is the question
With soft data already underpinning the narrative that the UK economy looks set for a strong recovery amid vaccine progress and the broader reopening, it is now over to the BOE to make their next move in terms of managing policy.
The market expects a taper to come, one way or another. Be it today or June or August. But what the market, and by that I mean the pound, doesn't want to see is the BOE stick to being more conservative and reserved in their messaging today.
It is going to be all about the language as the rate decision is a non-event, and with the BOE set to release its updated forecasts (which are likely to be more hawkish and upbeat), it will depend on whether or not they see fit to throw in a taper signal in there.
While the central bank isn't expected to taper QE purchases immediately, they could use this platform to provide more clarity in communication in terms of what they are going to do next considering the more hawkish elements expected.
That said, there is a strong argument that the central bank may also wait until June or August to really decide on this - should they want to wait for hard data to corroborate with the story that we are seeing from soft data and economic estimates currently.
Either way, a less hawkish and disappointing tone by the BOE today will not be the end of the world for the pound. In fact, I would view that as being a good opportunity to scale in long positions on the back of a stronger fundamental undertone in the currency.
The main risk for the pound is if the BOE turns out more dovish than expected and fails to tick the boxes in terms of setting up expectations of a taper to follow and the SNP winning a majority in the local elections.That said, I would expect dips to be bought with worries on the Scottish independence referendum likely to be phased out over time while the market continues to keep a firm focus on the more structural undertones in the pound.The BOE may put off any taper or tightening talk this month but will inevitably have to address that by August at the latest as the economy reopens in a more meaningful way.
