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“Earlier this month BoE Governor Carney delivered a speech in which he spoke of two potential paths for the UK economy: “one relatively bumpy”…” the other relatively smooth”,” Rabobank analysts note.

Key quotes

“It is clear that the direction of the UK economy following the start of Brexit in March 2019 will be very dependent on whether a trade deal is struck with the EU. The market consensus and the working assumption of the BoE is that a worst case scenario of no deal will be avoided. Even so, a continuation of political uncertainty could make it difficult for the BoE to tighten policy in November 2018 or February 2019. This strengthens the case for more normalisation from the BoE on August 2, particularly since recent UK economic data appear to have been sufficiently strong for the Bank to justify a move.”

“In his July speech Carney stated that “Employment is at a record high. Import price inflation is fading. Real wages are rising. And domestic inflationary pressures are gradually building to rates consistent with the inflation target”. It is our view that the BoE are likely to hike rates again at the August 2 MPC meeting. While this should offer some downside protection for the pound, the Brexit outcome is likely to have the larger impact.”

“Despite the ECB’s guidance that rates will be unchanged at least through the summer of 2019, it is our central view that the EUR will hold its ground vs. GBP such that EUR/GBP could remain around 0.89 on a 3 to 6 mth view. This assumes a UK-EU trade deal will be in place just before the commencement of Brexit next March. In the event of a no deal Brexit we see risk of a move towards EUR/GBP1.00.”