This week has seen two major central banks have their time in the spotlight, first was the BOJ who struck a hawkish tone, driving the JPY up, followed by the US Fed taking the stand last night with a more dovish tone. The FED back-tracked a little as it held rates on hold and stated that subdued inflation was an issue which required monitoring before further action could be taken. This resulted in the US Index, a measure of the strength of the USD against a basket of currencies, being driven lower as bears managed to maintain their grip on the 100 level, as they now look to test 99. Both of these central banks stated that they would remain vigilant of upcoming data and changes which may affect their views. Stronger data form either will see their respective currencies strengthen while worse than expected data will see their respective currency weaken.
Today is the turn of the Bank of England (BOE) to address markets. The BOE is expected to release its Official Bank Rate, expected unchanged at 0.25%, and also the Monetary Policy Summary and the all-important inflation Report. The BOE was forced to cut rates in Aug 2016 after the Brexit vote, with large dips in services and consumer data the catalyst for the cut. Since then, as we will see in the Inflation report, inflation has risen aggressively and should continue to rise given the devaluation of the Sterling post Brexit, leaving the BOE the difficult task of forecasting the future effect of inflation and growth in the UK so that they may accurately adjust their monetary policy stance. Should the BOE state that inflation and growth are expected to increase in the coming future, markets will change their stance form a rate cut mentality to a possible rate hike mentality which will result in further upside in the GBP which in turn will soften inflation and again give the BOE something to think about.
Overall a positive BOE meeting with a positive outlook for the future health of the UK economy which mitigated the previously large drawdown expected from Brexit, will see the GBP strengthen while a more pessimistic outlook will see the GBP weaken as market prepare for more uncertainty.