BoE: Hawkish pressure going off - Deutsche Bank

The weaker than expected UK’s June inflation print lowers the probability of the MPC moving at the August meeting given reduced concern of faster than expected inflation pass-through, according to Jack Di-Lizia, Strategist at Deutsche Bank.

Key Quotes

“Nevertheless, the BoE’s near term inflation projections will still need to be marked modestly higher at the Inflation Report. However, taking stock of the inputs to the MPC’s forecasts, revisions to the path further out should be limited.”

“Progress in the UK-EU negotiations has been modest so far, giving little signal that a transitional agreement can be announced in the near term. Together with the weaker data, this will help take pressure off the BoE to move over upcoming meetings.”

“We maintain the received Nov-17 MPC Sonia vs. Jan-18 Fed Funds. The risk reward to fading the recent flattening of the very front end is attractive, we add a Feb 18 – Aug 18 MPC steepener.”

“Further out, relative valuations suggest the 5s10s slope has more room to flatten than 10s30s in a carry positive environment. Together with index extensions and limited supply, the medium sector will be further supported by the upcoming BoE reinvestments, likely to be announced at the August IR. We go long the belly of the UKT 5s10s30s fly.”

“We stay long 2Y ASW vs. 5Y and maintain the short 30Y UK vs. Germany. We exit the 1Y1Y-2Y1Y Sonia steepener given limited catalysts for the market to price a more hawkish BoE path in the run up to the August IR.”