BoE likely to support pound amid brighter data
LONDON: The pound’s fortunes are being dictated by Brexit and recent optimism over a deal could lead to a more hawkish-sounding Bank of England (BoE) driving the currency higher.
Market bets on further BoE policy tightening have receded in recent weeks following August’s quarter-point interest-rate increase, with the next hike not fully priced in until the end of 2019.
While this could signal a non-event at today’s BoE announcement for sterling and gilts, there is a risk that current market thinking could prove too dovish.
“The stronger data flow supports the BoE’s decision to tighten policy last month, and could prompt the BoE to maintain a hawkish signal at this week’s policy meeting,” said Lee Hardman, currency strategist at MUFG.
“The pound has failed to reflect the stronger UK data flow and higher UK rates in recent months, which creates scope for catch-up strength if Brexit risks ease.”
The pound climbed this week after the European Union’s chief negotiator Michel Barnier said a deal was realistic by November, a change in tone for a market weighed down by the risk of no agreement before the UK leaves the bloc in March.
That was followed by strong UK growth numbers and above-consensus wage data, though the currency has struggled to hold gains above $1.30.
“What could move the market would be if we were to see the Monetary Policy Committee suggesting that market rate expectations are a bit too dovish,” said Daniela Russell, the head of UK rates strategy at HSBC Bank Plc.
“But they probably won’t want to push back too hard while Brexit uncertainty is high, and so front-end yields should stay well anchored and any sell-off is likely to be small and short-lived.”
Here’s what some analysts are saying ahead of today’s meeting:
> BMO Capital Markets
The balance of risks facing the pound over the release of the MPC minutes are tilted to the upside, but still expect the pound strength to be tempered by a lack of Brexit clarity, says Stephen Gallo, European head of currency strategy.
BMO strategists give an 85% chance that there is a 9-0 or 8-1 MPC split; upbeat assessment on economy, clear bias toward delivering additional rate hikes; and in that case, pound/US$ could see a knee-jerk reaction to jump 0.35%.
Still, over the longer term expect further increase in “cliff edge. Brexit” risks and thus prefer to continue playing EUR/GBP from the long side for now
> HSBC
HSBC’s Russell likes trading the front-end of the curve from the long side. The bank’s strategists think the risks are skewed towards the BoE not being able to tighten as much as it’s intending. “In fact, we still expect bank rate to stay on hold until at least the end of 2019 as we don’t think the underlying growth picture is quite as robust as some of the recent headlines might suggest,” Russell says.
> ING Groep NV
There is limited downside risk from the BOE, and “only really upside risks given the dovish market pricing,” said Viraj Patel, currency analyst.
Another hike not fully priced in until Dec 2019 so “there’s definitely scope for the UK curve to steepen in the event of a no-deal Brexit being averted.
> JPMorgan Chase & Co Strategists at JPMorgan including Francis Diamond see a 9-0 vote split to keep rates on hold. “Domestic politics should dominate the BoE and data over the coming weeks with the annual Labour and Conservative party conferences.
“Difficult to see actually dovish dissent given the data flow, but any sense that the MPC sees increased downside risk from Brexit would be taken as dovish by the market. — Bloomberg