GBP: Guided by BoE? - Rabobank

Comments from BoE hawk Saunders this morning suggest that he will likely be voting for an immediate rate rise next month, but after the warnings from Governor Carney yesterday, the market is far less convinced that a May move is on the cards, explains Jane Foley, Senior FX Strategist at Rabobank.

Key Quotes

“The MPC’s purpose is to evaluate and manage the ongoing performance of the economy. From that perspective it is hard to disagree with the comments from Carney yesterday.  However, it can be argued that the direction provided by the MPC in February was too strong and too dogmatic.”

“Next week will bring the release of the UK Q1 GDP report. The Bloomberg consensus stands at 0.3% q/q.  There are some reports in the market of economists revising lower their forecasts in respect of recent data releases.”

“It remains our house view that a BoE rate hike will be announced in May. However, in the absence of a recovery in UK economic data, the chances of a follow up move latter in the year are more questionable.  For the pound, a policy tightening in May should be supportive.  However, the impact of a move on the currency will be lessened if the MPC are fairly split on the wisdom of an immediate move or if the guidance is reigned back significantly.  May will also be an interesting month for the pound for other reasons.  At the start of this much there was much talk about cable’s tendency to rally in April.  Most likely this encouraged some speculative positions which may have fallen foul of yesterday’s comments from Carney.  May is not naturally associated with upside potential for pound.”

“The other major risk for the pound lies with politics. Reports today suggest that the EU has comprehensively rejected the UK’s proposals for avoiding a hard border across the island of Ireland. The result is heightened expectation that the UK may have to stay within the customs union.  This is counter to the pledges of the PM and a significant blow to the government.  For GBP, remaining in the customs union would reduce uncertainly and could be greeted well by investors.  That said, it could widen the rift between the deeply divided ruling Tory party.  Although we expect that the EU and UK will manage to put the bones on the table before Brexit, we currently see the market as being too complacent about political risks in the UK and see scope for a move towards EUR/GBP0.89 on a 3 mth view.”