Will The BoE Trifecta Give GBP A Boost Next Week?

The BoE August inflation report, policy meeting and minutes will all be released next Thursday at 1pm BST.

The inflation report and the minutes in particular will attract considerable attention. Investors will look for evidence that there were dissenters at the MPC who voted for a hike already in August. In addition, markets will pay closer attention to the latest set of growth and inflation forecasts looking for indications that the BoE is now expecting inflation to rebound more quickly towards its 2% target. Indications that there was a split vote at the MPC in August and that the BoE is now more constructive on the UK’s inflation outlook should encourage further frontloading of rate-hike expectations and support GBP.

The scope for GBP outperformance may be less pronounced, however, given the different response we got so far in the FX and the rates markets to the apparent hawkish shift at the BoE of late. Indeed, while GBP regained more ground against most of the G10 currencies, the reaction in the rates markets was quite subdued by comparison. As a result, GBP/USD is now trading somewhat higher than the level that seems consistent with the current 2y GBP-USD rate spread. This discrepancy also highlights the downside risks for GBP if the market expectations of a pronounced hawkish shift at the MPC are disappointed next week.

We stick with our bearish medium-term view on GBP/USD for now.

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