This morning’s release of the UK June Markit/CIPS service sector PMI survey provided a fillip to expectations that the BoE could hike rates again at the August 2 meeting and the pound found some support on the news with EUR/GBP dipping to the lowest levels since last Thursday, notes Jane Foley, Senior FX Strategist at Rabobank.
Key Quotes
“The money market sees a roughly 60% chance of a rate hike in August with the uncertainties regarding Brexit continuing to cast a dark shadow over the ability of the MPC to tighten monetary conditions.”
“There is a chance that there may be greater clarity on the UK Government’s Brexit plans by the end of the week. This prospect is, however, marred by widespread speculation that the series of meetings that PM May plans to have with government ministers at her country residence at the end of the week will descend into a showdown. Indeed, there is even talk of cabinet resignations.”
“Even if the UK government does manage to thrash out a Brexit plan, there is no guarantee that it will be accepted by the EU.”
“Officially it is hoped that the EU and the UK will have agreed on a post Brexit plan by October. This would leave the various EU parliaments to ratify the new agreement before Brexit starts in March 2019. However, the discord within the UK government makes this deadline currently appear ambitious.”
“Although there is good reason for the BoE to want to further normalise interest rate policy, the chances that a Brexit deal will not be struck in the coming months leans again the risk of a policy tightening. On balance it is our house view that a rate rise will be announced. This should lend GBP some support and guard against the dangers of another Brexit induced GBP sell off which would complicate the UK inflationary outlook over the medium-term.”
“We continue to see risk that EUR/GBP will edge up to the 0.89 level during H2 on the back of political uncertain. In view of our bullish outlook for the USD, we see risk of cable dropping to 1.28 by year end.”
Share
