What is priced in ahead of the BOE policy decision tomorrow?

<p>As inflation continues to be a problem and wages data remain strong, the BOE will have not have much of a choice but to raise the bank rate by another 25 bps this week. The decision tomorrow is pretty much a given but the question will be how much more does the central bank need to curb inflation pressures?</p><p>Ultimately, that will come down to the data but it needs reminding that the expectation going into tomorrow is one that has been watered down after the UK June CPI figures <a href="https://www.forexlive.com/news/uk-june-cpi-79-vs-82-yy-expected-20230719/" target="_blank" rel="follow">here</a>. At the time, traders were even considering a decent likelihood of a 50 bps rate hike by the BOE but now the pricing suggests that a 25 bps move is the most likely outcome.</p><p>According to the OIS market, a 25 bps rate hike is fully priced in with traders even over-compensating with odds for a 50 bps move being at 37% currently. As such, the expectation is that traders are going to hope for the BOE to continue with the recent policy language – in that they will leave the door open to tighten further in the months ahead.</p><p>Here's a look at the OIS curve in pricing in the future path of rate hikes:</p><p>That has fallen off quite a bit from the near 6% pricing of the peak previously and a lot of that owes to the softer UK inflation numbers last month. But the fact is, traders are still pricing in at least three more rate hikes by the BOE for year-end and therein lies the risks for the pound.</p><p>The currency may have a bit more of a muted reaction tomorrow if the BOE delivers as expected and offers no pushback on the current market pricing. But if the central bank hints that they may be nearing the end of the tightening cycle, there is going to be a heavy backlash against the pound considering the pricing above.</p><p>If markets are looking for at least three more rate hikes and the BOE isn't going to deliver on that, a pullback is overdue and that is going to weigh strongly on the pound. So, that's a key risk to consider and I would say on the balance of things, the risks are skewed to the downside.</p><p>Because alternatively, if the BOE alludes to being more data dependent, then markets do not have to try and work out pricing in more than what they currently are doing until we get to the next UK inflation report on 16 August.</p>

This article was written by Justin Low at www.forexlive.com.