Bank of England hawks can't help the pound – Deutsche Bank


Oliver Harvey, Macro Strategist at Deutsche Bank, expects the Bank of England to remain on hold today, but not to out-dove the market.

Key Quotes

“There is nothing in the way of hikes priced for the meeting and around a 50% chance of one before year-end, but the messaging from the MPC has become more hawkish in recent months, particularly with respect to the exchange rate. In our view, assuming policy remains unchanged, the meeting statement and Carney's comments at the press conference are more important than the voting split. We see little prospect of a rate hike majority without support from the governor. But with the pound having corrected some of its overshoot to rate spreads versus the dollar and looking slightly cheap versus the euro, we wouldn't be adding to sterling shorts on account of the Inflation Report.”

“Bigger picture, the pound's sensitivity to monetary policy has fallen. As figure two shows, correlations between UK rates and sterling have collapsed, particularly at the short-end of the curve, reflecting a wider regime shift in FX markets. Structural flow dynamics appear to be becoming increasingly important, so we take the opportunity to recap recent developments in the UK's balance of payments.”

“On a forward looking basis, however, high frequency indicators suggest that appetite for UK assets may be waning. Our 'live' M&A monitor has had a good record of predicting FDI flows historically and has also tracked GBP TWI well over recent years. Inflows fell from record highs following the Brexit vote and have yet to show signs of picking up. Foreign gilt purchases currently stand at 4bn so far this year, against a sizeable GBP 34bn in the second half of last year.”

“In summary, the pound looks vulnerable in a world in which structural flows take over from monetary policy as the key drivers of FX markets. We remain comfortable with our medium term long EUR/GBP recommendation.”

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