Date: 19 Mar 2018

It will be a lively week for sterling (GBPUSD, EURGBP) with a plethora of economic data, a Bank of England policy meeting and a European Union (EU) leaders summit. Where to begin? Traders will certainly be interested in Tuesday’s (0930GMT) UK inflation data for February. Current expectations are for year-on-year CPI to have risen by 2.8 per cent a less pronounced increase than January’s 3.0 per cent print. A yet softer print for February could lead traders to scale back their expectations of the pace of Bank of England (BOE) rate hikes in 2018. On the other hand if, for example, core CPI remains “sticky” at 2.6 per cent, the opposite impact might be seen. But having cleared the CPI hurdle, the currency market will be refocusing on Wednesday’s earnings and jobs data. Headline and ex-bonus earnings are forecast to have ticked up to 2.6 per cent year-on-year from the previous month’s 2.5 per cent. A stronger-than-expected earnings print might be expected to support the hawkish rate case at the BOE and prove supportive for sterling. But the rollercoaster continues on Thursday with the unveiling of ONS UK February Retail Sales data. That figure will be released at 0930GMT before the Bank of England makes its announcement on policy at midday. Again, a strong retail sales print might play to policy hawks at the BOE. The BOE will also have the advantage of knowing what the Federal Reserve had done/said on Wednesday.

That said there is no expectation the BOE will raise rates on Thursday but there is the possibility that the UK’s central bank will opt for a hawkish hold. That could re-invigorate a market that’s already pricing in a 70 per cent chance of a rate hike in May. Traders may want to keep an eye on the vote. The expectation is for a 9-0 vote to keep rates unchanged. If even just one member of the Monetary Policy Committe voted for a hike, that would put the cat among the pigeons. The odds are that such an outcome won’t occur but traders might wish to consider it. There’s also the possibility that even if the BOE announces a hawkish hold, its view of the prospect for future rate hikes will still be Brexit-contingent. And that brings us nicely to the event risk that is this week’s EU leaders summit on Thursday and Friday. If the result of this summit is that the United Kingdom and the European Union agree terms for a “transition deal,” possibly, as has been suggested, ending in December 2020, then that would remove or at least greatly reduce the chances of a “hard” Brexit, and sterling could well benefit. So much to consider. Sterling traders will have to have their wits about them this week.

Written by Neal Kimberley, External Currency Analyst.