BoE: Type of hiking cycle matters more for GBP - ING

The debate over the timing of the first Bank of England rate hike – and what looks at this stage weighing up November versus February – may just be short-term noise in the overall extent to which BoE policy can influence GBP price action, feels Viraj Patel, Foreign Exchange Strategist at ING.

Key Quotes

“We think there are two types of hiking cycles to consider:

1.    'Withdrawal of stimulus' which should be interpreted as a 'one or two and done' type of hiking cycle.

2.    'Gradual and limited' hiking cycle which may indicate a more open-ended BoE normalisation path that would result in a much steeper market curve than the above alternative.”

“While the BoE statement contained both signals, the emphasis on a 'withdrawal of stimulus' means we expect any future BoE policy normalisation to be more in line with the idea of a 'one or two and done' type of hiking cycle – as opposed to a Fed-like policy tightening cycle.” 

“The shift higher in the UK rate curve following yesterday’s hawkish BoE tone means we’re not too far off the extent to which short-term rates are expected to move up towards in our 'withdrawal of stimulus' hiking cycle scenario.”

“BoE policy repricing to offer GBP a one-time boost

Over the coming weeks, we expect greater BoE forward guidance in line with our 'stimulus removal' hiking cycle scenario to cap the extent to which GBP can move higher. A further 25-30bp move higher in short-term UK rates will, at best, offer GBP a one-time boost. Our model-based simulations show GBP/USD could move up to 1.35-1.36 but would likely face strong resistance here. For EUR/GBP, we think the move lower could extend to the 0.8750-0.8800 area if the BoE-fuelled GBP rally continues.”