Giles Coghlan LLB, Lth, MA
HYCM
On Sep 22 the BoE meets and will decide on how to best proceed with monetary policy. The BoE, like other central banks, is having to rapidly hike rates as it finds itself behind the curve to try and cool inflation as quickly as possible. Will the BoE hike by 50 bps or 75bps? A larger 75bps hike will signal the BoE is getting tough on inflation. The implied interest rate curve sees the BoE hiking interest rates to 4.5% in the summer of next year. Interest rates are currently at 1.75%, so there are plenty more hikes expected. One key question going forward is going to be when will the BoE signal a pause? Will it confirm a 4.50% terminal rate or push back against it?
If the BoE signals less aggressive action and hikes by less than expected/push back against a 4.5% terminal rate then the GBP could fall lower. This would favour the EURGBP upside with the ECB growing more and more hawkish to tackle eurozone inflation. This would also chime with a decent period of EURGBP strength around the end of September and the start of October.
Major Trade Risks: The major risk here is if the BoE takes a more hawkish stance and that could lift the GBP higher and invalidate this outlook.
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