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GBP: Time for some clarity from the BOE - MUFG

FXStreet (Delhi) – Derek Halpenny, European Head of GMR at MUFG, suggests that it’s ‘Super Thursday’ and the financial markets are expecting some degree of clarity from the BOE in regard to the outlook for monetary policy.

Key Quotes

“The OIS market is close to pricing in the first full 0.25-point increase by this time next year. (85% priced). We continue to believe that is far too late into the future and today may encourage the market to push that timing further forward having gone out to Q1 2017 in early October. Just this month we pushed back our call for the first BOE rate increase from February to May.”

“With the FOMC increasingly looking like it will go in December, the BOE may feel more comfortable with shifting market expectations today. Let’s not forget, Governor Carney has consistently stated that a decision to raise rates would “come into sharper relief around the turn of the year”. A reminder of that today would certainly send a message to the markets that current market pricing is incorrect.”

“The vote from today’s meeting may be just as important as the details of the Quarterly Inflation report. 8-1 remains the likeliest outcome, just. But Martin Weale may well join Ian McCafferty and it is also feasible that Kristin Forbes may join the vote for a hike as well. A 6-3 vote would certainly trigger a big shift in market expectations. The way to play a hawkish BOE today would be to hold the pound versus non-dollar currencies. Obviously given what the Fed is doing, the pound will perform much better versus the likes of the euro, Swiss franc and Swedish krona.”

“Finally, the Quarterly Inflation Report itself is unlikely to deviate hugely from the report released in August. The inflation projection for Q3 was 0.06% and the outcome was 0.03%. The main change will be real GDP projections with Q3 real GDP weaker than expected. The BOE projected 2.73% but the outcome was 2.29%. A weaker GDP profile may marginally change the CPI profile but we would still expect the projections to show 2.0% being achieved in two years’ time. As always, assumptions on wage growth and productivity will be important in that regard. We’d expect the assumption on excess labour capacity will have been lowered given the clear evidence of wage growth picking up.”

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