Bank of America: Trading the BoE

03 February,, London – On Thursday we will witness the BoE’s February interest rate decision along with minutes from the meeting and the quarterly Inflation Report (QIR).

No hike in sight

Bank of America Merrill Lynch does not expect a rate hike any time soon. Although unemployment keeps declining, wage growth is still not strong enough and the data since November point to low inflation lasting even longer. Moreover, the forthcoming EU referendum provides additional uncertainty.

“We expect a dovish BoE to revise down growth and near term inflation forecasts whilst keeping the 3y forecast above target,” Bank of America projected.

Also, BoAML consequently expect Thursday’s QIR to be more dovish than of November’s.

“We believe the BoE will signal the market’s dovish outlook for rates is out of sync with the BoE’s own by forecasting inflation above target at the 3y horizon,” Bank of America added.

Bank of America: Trading the BoE

Trading the BoE

Further GBP weakness will likely remain in line with the EU Referendum. However, according to BoAML weekly proprietary flows, Hedge Funds have been taking profit on its short GBP exposure which hints some stabilization in the short term.

Moreover, given the declining correlation between the Fed and BoE interest rate hike expectations, markets might be unwilling to meaningfully price in expectations for BoE hikes until the risks of the EU referendum has passed. Despite Gov Mark Carney’s recent speech, where he insisted that growth was solid and consumer confidence was high, the question on when to hike interest rates is “unknowable”.

“We believe UK rates markets will therefore have little appetite to bring forward UK rate hike expectations and GBP will thus lack a significant pillar of support,” Bank of America added.

Consider reading: BNP Paribas: Post RBA outlook & STEER analysis

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