Spotlight on BoE and Fed on Super Thursday

It’s been another relatively slow start to the trading day on Thursday but investors have a lot to look forward to as we head into the end of the week with the Bank of England stealing the spotlight as the Brexit debate heats up. We’ll also get some economic data from the U.S. and hear from some Fed officials throughout the session.

“Super Thursday” gets underway with the interest rate decision from the BoE and the release of the minutes and inflation report alongside it. The interest rate decision itself is likely to be a non-event, with rates and asset purchases widely expected to remain unchanged at 0.5% and £375 billion, respectively. This could all change in the months ahead though, with the U.K. going to the polls on 23 June to vote on whether to remain in the E.U., and investors are keen to know exactly how this will impact the MPC’s outlook and actions.

Governor Mark Carney has made no secret of the BoE’s belief that a vote to leave the E.U. would have negative implications for the U.K. economy – to the anger of the “Leave” campaign – and so I doubt he will hold back today in his views. What investors would like to know though is how the central bank would respond to such an event given that it is far from straightforward.

A rate cut to safeguard the economy against any backlash from voting to leave would ordinarily be a sensible response but given that sterling would likely fall dramatically in that scenario, the central bank would effectively be cutting rates at a time when inflation could already be at risk of far exceeding its target. Alternatively, a rate hike to offset the depreciation of the currency and manage the inflationary impact could deliver another blow to the economy sending into or worsening a recession that could follow. Whatever the BoE does, it seems the negative consequences could be significant.

Clearly the more desirable outcome for the BoE is the status quo, which I expect it to state in the inflation report and Carney to reiterate during the press conference 45 minutes later. Even under this scenario, the central bank may be forced to be more active than it’s been in recent years as the slowdown in the economy in the lead up to the referendum has led many to suggest a rate cut from the BoE may be warranted this year. I guess this will come down to how temporary policy makers believe this slowdown will be and whether they anticipate a rebound in the second half of the year, pending a vote to remain in the E.U., of course. Given the number of possible issues here, I expect it to be a volatile day for the pound and U.K. bonds. The FTSE should be less so given the global nature of the index and relative low reliance on the U.K. economy.

We’ll also hear from a number of Federal Reserve policy makers throughout the session today which could spring the markets back to life. Loretta Mester, Eric Rosengren and Esther George are all due to speak on Thursday, all of whom are voting members on the FOMC this year so their comments will be of great interest ahead of the June meeting, which the markets have currently written off as being “live”. The Fed has continued to state that a rate hike could happen at the meeting but as of yet, the markets are not buying it and if that doesn’t change, a rate hike is extremely unlikely. We’ll also get jobless claims data shortly ahead of the opening bell on Wall Street.

Economic Calendar

For a look at all of today’s economic events, check out our economic calendar.

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Craig Erlam

Craig Erlam

Former Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary.

His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News.

Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.