GBP to take cues from the BoE - Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, BoE’s outlook for monetary policy is likely to take the upper hand as compared to the Brexit in guiding the outlook for the pound.

Key Quotes

“As its stands a 25 bps rate hike next month is already mostly priced in. The implication is that there may not be much additional upside potential for GBP on a rate hike next month unless the Bank steps up its hawkish rhetoric further.  After the expected move from 0.5% to 0.75% this spring, the market is not fully priced for a hike to 1.00% until May 2019.  This suggests that for GBP, the most interesting part of next month’s policy meeting may not be the rate decision but the guidance referring to the risk of another rate rise later in the year.”

“It is our view that there is a good chance that the BoE will follow a spring rate hike with an additional move in November. However, there are clear risks to this view. Winter weather has impacted recent economic activity and February UK CPI inflation data were softer than expected.  This suggests that the Bank may be less inclined to reinforce a hawkish outlook next month.”

“Brexit may also bring complications for the policy outlook.  It is hoped that an outline trade deal between the EU and UK will be on the table by October this year.  This, however, could prove optimistic.  It trade talks are not going well, the Bank may find it more difficult to inflict another rate hike on the economy.  For now we expect that GBP will continue to draw some support from the anticipation that the BoE will maintain a hawkish position in the coming month, though ultimately we would expect the pound’s biggest moves over the next 12 months to be related to Brexit.”

“As the summer months approach, we see scope for concern about the progress of Brexit trade talks to weigh on the pound and see risk for EUR/GBP to edge towards 0.89 on a 3 mth view. That said, it is our house view that the bones of a free trade deal will be in place by March 2019.  We expect that this should spark a push back to 0.84 on a 12 mth view.”