BoE Preview: GBP/USD at 1.3170 on a hawkish V-shaped recovery view – TDS

Bank of England’s meeting, on 6 August at 06:00 GMT, isn’t expected to bring any major policy decisions. Therefore, economists at TD Securities expect a limited reaction as USD direction dominates. Dovish shifts represent the MPC marking itself to market. A hawkish surprise could help GBP close its value gap, but sterling still faces headwinds from a sluggish recovery and ongoing Brexit concerns.

Key quotes

“Hawkish (35%): V-shaped recovery. Rates and QE unchanged. MPR has an illustrative scenario rather than formal forecasts, suggesting that MPC could not agree as Haldane continues to push V-shaped recovery. H2 2020 and 2021 GDP growth still unrealistically strong and u-rate forecasts hold below consensus view. Medium-term inflation returns to target 2-3y forward, leaving no real need for QE beyond end-2020. GBP/USD 1.3170 EUR/GBP 0.8950.”

“Base Case (55%): Realistic Recovery. Rates and QE unchanged. BoE moves to more realistic macro forecasts, with slower recovery from H2 2020 onwards and GDP back to end-2019 level in 2022/23. U-rate seen ~8% at end-2020, in line with consensus. 2-3y inflation forecasts slightly below 2% target. BoE ‘stands ready’ to do more, but Bailey clearly more concerned about longer-lasting damage to economy and labour market in particular. GBP/USD 1.3110 EUR/GBP 0.9020.”

“Dovish (10%): Double-digit u-rate into 2021. Rates and QE unchanged. BoE slashes macro forecasts and sees u-rate at/near double digits into 2021, more in line with NIESR and OBR fcsts. Medium-term inflation forecasts are much lower on yawning output gap, with clear signal that QE will need to be extended into 2021. GBP/USD 1.3005 EUR/GBP 0.9065.”