The last Bank of England meeting at the start of August was mildly bullish. The Bank of England managed to communicate that it was laying the groundwork for gradual policy normalisation. Growth and inflation were revised higher with GDP projected to increase to 6.0% in 2022. Inflation (which the BoE see as transitory) is seen as spiking this year to 4.00%, but then receding back to 2.5% in 2022. The bank also signals intention by saying that the balance sheet reduction could occur at 0.5% now rather than the 1.5% previous level required.
A few points to note since the last BoE meeting
- Monthly production fell in June. The fall in production was led by decreases of 11.9% in mining and quarrying and 1.9% in electricity and gas; these were offset partially by a 0.2% rise in manufacturing and a 1.1% rise in water supply and sewerage.
- The unemployment rate fell to 4.7% from 4.8% expected.
- CPI was a surprise miss at 2.0% vs 2.3% y/y expected. This should only be a blip as UK retailers are already talking about significant pressure on supply chains. Prices should rise.
- Retail sales was a miss at -2.5% y/y vs 0.2% expected. This was explained away as a hangover from the stellar euro print. This makes sense as the latest CBI data says that retail sales were soaring in August. It was the highest reading since 2014.
- UK Chancellor Sunak stated that the UK economy is recovering very strongly.
The bottom line
The GBP is still broadly bullish and dips can be bought. The trendline on the GBPJPY looks particularly interesting for a long. Watch out for a souring risk tone to invalidate this outlook and strengthen the JPY.
Other points to note
Watch out for any significant deterioration in the UK economy. An upside outperformance remains if inflation is seen ticking higher which would make sense with supply warnings already out heading into Christmas.