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10 Dec 2015
BoE Preview: What happens if the hike comes? (Not today, of course) – Deutsche Bank
FXStreet (Delhi) – Oliver Harvey, Macro strategist at Deutsche Bank, suggests that he doesn’t expect many surprises from today’s Bank of England meeting and minutes.
Key Quotes
“Nevertheless, the ability of the MPC to surprise markets and u-turn on prior communication should never be discounted as last month’s very dovish QIR, or Carney’s abandonment of numerical forward guidance last year demonstrates. One element of our bearish sterling view is that having taken hikes off the table for the first half of 2016, the committee may lose the chance in the second. What happens if neither is the case?”
“In the first place, GBP/USD has been very sensitive to the relative timing of BoE/Fed hikes, so communication downplaying last month’s dovish Inflation Report should see a squeeze. Yet rates market pricing is essentially unchanged since then, suggesting investors ‘didn’t believe’ the message in the first place.”
“Further ahead, the market is already pricing a Bank of England hiking cycle towards the end of 2016. Repeating the analysis of DB colleague Sebastien Galy for the euro, forwards would imply rate spreads consistent with GBP/USD heading well into the low 1.40s next year and sub-1.40 early in 2017. This is not as aggressive as our current forecast of 1.27 by end-16, but still the right direction.”
“Of course, the market is currently pricing a very benign path for rates, consistent with BoE rhetoric. But the same is true of the Fed, where the market is significantly out of line with the FOMC medium dot. A more gradual BoE cycle would also make sense given the higher sensitivity of the housing market to short end rates, and weaker British productivity.”
“A bigger risk would be that the market re-prices hikes towards matching or even outpacing the Fed. We don’t think this is realistic for two reasons. First, it would require data to spook the Bank of England about losing control of price pressures. But the latest labour market data shows wage growth falling not strengthening and UK breakevens are heading back down again. Second, it would completely undermine the BoE’s concern over FX strength. For these reasons, we remain comfortable with being short GBP/USD even if the BoE turns hawkish again.”
Key Quotes
“Nevertheless, the ability of the MPC to surprise markets and u-turn on prior communication should never be discounted as last month’s very dovish QIR, or Carney’s abandonment of numerical forward guidance last year demonstrates. One element of our bearish sterling view is that having taken hikes off the table for the first half of 2016, the committee may lose the chance in the second. What happens if neither is the case?”
“In the first place, GBP/USD has been very sensitive to the relative timing of BoE/Fed hikes, so communication downplaying last month’s dovish Inflation Report should see a squeeze. Yet rates market pricing is essentially unchanged since then, suggesting investors ‘didn’t believe’ the message in the first place.”
“Further ahead, the market is already pricing a Bank of England hiking cycle towards the end of 2016. Repeating the analysis of DB colleague Sebastien Galy for the euro, forwards would imply rate spreads consistent with GBP/USD heading well into the low 1.40s next year and sub-1.40 early in 2017. This is not as aggressive as our current forecast of 1.27 by end-16, but still the right direction.”
“Of course, the market is currently pricing a very benign path for rates, consistent with BoE rhetoric. But the same is true of the Fed, where the market is significantly out of line with the FOMC medium dot. A more gradual BoE cycle would also make sense given the higher sensitivity of the housing market to short end rates, and weaker British productivity.”
“A bigger risk would be that the market re-prices hikes towards matching or even outpacing the Fed. We don’t think this is realistic for two reasons. First, it would require data to spook the Bank of England about losing control of price pressures. But the latest labour market data shows wage growth falling not strengthening and UK breakevens are heading back down again. Second, it would completely undermine the BoE’s concern over FX strength. For these reasons, we remain comfortable with being short GBP/USD even if the BoE turns hawkish again.”