Despite sterling's appreciation, investors harbor serious skepticism of talk that the Bank of England could raise rates at its August 3 meeting, notes the analysis team at BBH.
“Interpolating from the OIS, the market sees about a one-in-eight chance. The notable thing is that it was less than one percent a month ago. This week's economic data will offer more evidence for the majority at the MPC that there is no rush to raise interest rates.”
“Many expect UK CPI to have stabilized in June at 2.7%. The risk is asymmetrical. A strong report would not necessarily persuade the MPC, while a weaker report could prompt investors to push down market rates and push sterling lower. The year-over-year pace has not slowed since last year's referendum in any month but was flat twice. Many expect the spur from the past sharp depreciation of sterling and the oil prices will fall out of the year-over-year comparisons soon.”
“A couple of days later on July 20, the UK reports retail sales. Some recovery after the sharp 1.6% contraction (excluding auto fuel) in May is expected, but the flatter the bounce, the more sentiment will focus on the squeeze on wages from subdued increases in nominal pay and the still high inflation. Sterling and UK interest rates may be sensitive to any disappointment.”
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