GBP: Between BoE expectations and Brexit - Rabobank

According to analysts from Rabobank, point out that a hawkish Bank of England and a transitional deal on Brexit is good news for the pound. They see a stronger pound emerging in the medium-term but they warn that there could still be choppy waters to be navigated in the coming months.

Key Quotes: 

“The fact that the BoE chose not to use its March policy meeting as an opportunity to push back against market expectations of a May rate hike endorses the risk of a spring move. That said, the pound was quick to give up the gains made immediately after the BoE’s March policy statement. Although the news that two members had voted for an immediate rate increase provided a hawkish headline, the market was already very strongly priced for a May move. Looking forward the pound is likely to continue deriving support from expectations that the Bank could hike rates both in May and potentially in November. However, politics related to Brexit could yet create scope for volatility in sterling during the course of the next 12 months.”

“In December sterling’s better tone soon soured as the market began to contemplate that the Brexit procedure could still run into significant hurdles. Although the Brexit process has clearly progressed since then, the forthcoming trade talks could still unsettle GBP bulls.”

“For the BoE, the progress made on Brexit talks removes a hurdle to potential rate hikes. Comments from MPC member Vlieghe this week suggesting that he sees the potential for “one or two” quarter-point rate increase per year over the forecast period has strengthened market expectations that the BoE is determined to normalise policy over the medium-term. Although a May move is well price in, the GBP could potential draw further support from expectations of a persistent series of rate hikes, though this would necessitate firm evidence that wage inflation was gathering pace.”

“Assuming that the bones of a free trade deal is in place by the end of March 2019 we see GBP recovering to the EUR/GBP 0.84 (this will shortly become our 12 mth forecast). That said, on the assumption that uncertainty regarding Brexit could undermine GBP in the coming months we still see risk of a move back to 0.89 on a 3 mth view.”