GBP: knife edge? – Rabobank

According to analysts at Rabobank, the extent of any GBP rally on a unchanged policy decision from the Bank of England today could be tempered by a couple of factors. Firstly, the Bank could drop a heavy hint that a rate cut could follow in May. Secondly, the news surrounding Brexit is also likely to be back in the headlines in the coming weeks.

Key Quotes:

“The fact that UK CPI inflation is running at just 1.3% y/y, well below the BoE’s 2.0% y/y inflation target, provides a very strong argument in favour of BoE rate cut either today or in in the months ahead. Weak UK GDP growth in the 3 months to November (+0.1% 3m/3m) and a shockingly poor performance of the retail sector in December add weight to this view. That said, forward-looking January PMI data were better than expected and the pick-up in activity in the housing sector is suggestive of a post-election Boris bounce. The MPC may therefore decide to wait a little longer to assess the impact and the extent of a calmer political backdrop on confidence. That said, political risk may be on the brink of returning.”

“The 80 seat majority won by Johnson in the UK election in December ensured that his EU Withdrawal Bill would pass through parliament. Yesterday, the EU parliament voted in favour of ratifying the Withdrawal Agreement which further clears the way towards the UK exiting the EU tomorrow night. That said, the relief in the market that political uncertainty has died back could be tested if the forthcoming talks between the EU and the UK on their future arrangements prove to be difficult.”

“We see risk that any GBP rally today could be short-lived and expect that GBP/USD will be trading below the 1.30 level on both a 3 and 6 month view.”