BoE: Dovish hike or no hike are more likely outcomes – Nordea Markets

Andreas Steno Larsen, Research Analyst at Nordea Markets, suggests that while the market is convinced that Bank of England will hike firmly on Thursday, they think either a very dovish hike or no hike at all are more likely outcomes of the meeting.

Key Quotes

“Most analysts agree that the Bank of England will hike the bank rate on Thursday and the market is accordingly pricing above 80-90% implied probability of a hike.  We are, however, less certain that BoE opts for a hike, because

1. The unemployment rate remains glued to the latest NAIRU-assessment of around 4.25%, while wage growth has decelerated compared to latest inflation report from May (from 2.9% to 2.7%)
2. Core inflation has surprised on the downside compared to the May inflation report, while headline has developed more or less in line with the May projections from BoE.”

“In sum, it is hard to see any reason for increased optimism on wage growth and core inflation in UK compared to the inflation report from May.”

“Also, the most recent voting indications given by MPC members haven’t convinced us that the >90% implied probability of a hike is a fair reflection of the probability of such an outcome.”

“Ultimately, we think the MPC will vote to keep rates unchanged by a 5-4 margin, but the view hinges on a dovish revision of the projections by the BoE staff.”

“The bottom-line is that we favour a short GBP position in to the meeting from a risk/reward perspective.  Even a dovish hike could end up as a GBP negative event, given the current pricing of BoE.”

“If the MPC set aside credibility considerations, there are no reasons to hike in the UK.”

“Brexit insurance costs are on the rise

• On top of the potential dovish surprise from BoE, the option market is again increasingly indicating that market participants are willing to pay up for GBP downside protection.
• We continue to look for levels above 0.90 in EUR/GBP, before considering a positive GBP stance.”