Based on BoE MPC Rate Vote, is Summer rate hike imminent? Get the viewpoint of a Foreign Exchange Strategist as he has hinted a possibility of this.
9 February, GKFX – Viraj Patel, Foreign Exchange Strategist at ING, explains that Governor Carney and his colleagues delivered a pretty clear signal that the Bank of England is looking for a summer rate hike – with the post-meeting statement noting that “policy would need to be tightened somewhat earlier and by a somewhat greater extent” than anticipated in November.
BoE MPC Rate Vote Aftermath: Summer rate hike imminent?
The 9-0 vote should be interpreted as the fact that most MPC members see this as largely contingent on the BoE’s smooth Brexit assumption holding tact. In principle, that means a Brexit transition deal being signed, sealed and delivered over the coming months.
Given that markets will be fully aware of this Brexit-contingent hawkish signal, GBP’s gains in the near-term may be slightly more tempered than one would have typically expected from such forward guidance.
While we continue to look for GBP/USD to move up to 1.45 as the UK economy regains some of its cyclical swaggers, we do think that patience is required before markets take that bet – not least until there is greater clarity on a UK-EU transition deal (which is likely to materialise over the next 4-6 weeks ahead of the 22-23 March EU leaders).
GBP Price Drivers
But as we point out in our four GBP misconceptions below, we do think there is still a positive UK-specific story to be priced into GBP and cite two non-mutually exclusive catalysts:
(1) positive UK data surprises and
(2) reduced UK economic uncertainty in the form of an agreed Brexit transition deal.
Indeed, on the former, we note that the UK OIS curve has become much more sensitive to UK data – which will give the Bank some relative comfort. One could argue that today’s hawkish message was in part to ensure this relationship held and that markets would not revert back to their Brexit-focused mindset (ie, neglecting resilient UK data).
Should the investment side of the UK economy positively surprise to the upside in 2018 (via the theoretical lens of reduced Brexit uncertainty), there is the potential for the UK rate curve to steepen further – and help lift the pound. Therefore, the Bank’s upward revision to 2018 UK GDP (from 1.6% to 1.8%) isn’t necessarily a top.
Near-term FX implications: Investors looking for tactical opportunities may see greater value in EUR/GBP downside from any hawkish BoE tilt given that the dollar may stage a mini-recovery in February. We’re targeting 0.86 for 1Q18 – with the Italian elections and more cautious ECB talk keeping EUR/GBP upside in check.
This article BoE MPC Rate Vote Aftermath: Summer rate hike imminent? was written by analysts at GKFX. The information provided herein is for general informational and educational purposes only. It is not intended and should not be construed to constitute advice.
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