GBP: Devil is in the detail – Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that the money market is this morning suggesting that the chances of a 25bps BoE rate hike today is around 90% priced in.

Key Quotes

“The implication is that if the MPC were to decide to stand pat, this would be more disruptive than a hike since a steady policy announcement today would very likely lead to a sharp drop in the value of the pound.   This alone is a powerful argument in favour of a BoE policy move today.”

“We do anticipate that the committee’s decision will be split today and that a rate hike (which we expect) could be the last for a while.   How GBP reacts will depend on how this is communicated.”

“Given that there is talk in the market of a dovish hike, Carney may be able to sound a little more hawkish than expected and so provide some additional support for GBP in the near-term.   Either way we expect political uncertainty to erode support for GBP in the coming weeks and expect EUR/GBP to trade back up to 0.89 on a 1 mth view.”

“We would anticipate that a hard Brexit would drive EUR/GBP towards parity and this would trigger another round of damaging inflationary pressures in the UK.   The Bank would be left with the difficult decision of whether to soften policy settings to support the real economy or to hike rates to prop up the pound in an effort to stamp out the erosive effects of inflation.”

“A rate hike now could limit GBP’s downside on a hard Brexit and simultaneously provide the MPC will a little more ammunition should it be forced to cut rates again in the coming year or two.”