Likely EURGBP Scenarios on Bank of England's Super Thursday

Days of strength leave the British pound looking expensive at the start of the keenly anticipated Bank of England 'Super Thursday'.

A strong run of economic data at the start of November leaves the pound sterling looking richly priced heading into the BoE Inflation Report and interest rate decision of Thursday the 5th of November.

We have reported that the pound is looking overbought against the euro in particular but the same argument can also be made across many of the sterling pairings.

So, in our opinion market positioning means the Bank of England has to deliver a couple of unequivocally hawkish pieces of guidance regarding that elusive interest rate hike.

However, this does not mean the pound will not shoot higher. On the contrary momentum has built up a head of steam that will be hard to stop.

The bottom line? There will be movement.

With no interest rate change expected currency markets will be left looking at vote composition, guidance on data, the tone of the report and verbal slips from Mark Carney & Co. in the press conference.

Richard Kelly, Head of Global Strategy at TD Securities in London has taken a stab at potential currency reactions to potential scenarios that could – or could not – happen at the event. (Are you getting the picture of how difficult this is to predict?)

Scenario: GBP to Fall Against the Euro (35% Chance)

Risks: Downgrades to the growth and inflation paths, as the causes of the downward revision to inflation are deep-seated in core and will persist, with 2-year inflation revised down to 2.0%.

What Could Happen: "EURGBP to see some short covering after trending solidly low-er since mid-Oct. Ultimately, we see risks of a squeeze up to resistance around 0.7168 then 0.7200, particular-ly if currency concerns remain prominent," says Kelly.

Scenario: GBP to Rise Against the Euro (50% Chance)

Risks: TD Securities believe the MPC will want to steepen the curve somewhat, having the market price in slightly more 18m-3y forward in order to manage potential upside risks to inflation in 2017/18.  

Look to '17/'18 inflation forecasts for BoE signalling concern over financial markets’ implied timing of the first Bank Rate hike.

What Could Happen: "The EUR-GBP down-trend to extend further with a near-term target of support at 0.7026."

Scenario: GBP Rockets Higher (15% Chance)

Risks: The IR comes out swinging against low market interest rate expectations, either via an upward revision to the (already over-shooting) 2017/18 inflation forecast or with an outright statement that markets are too sanguine.

What Could Happen: "Additional EURGBP downside risk with an eventual re-test of the July lows at 0.6936," forecasts Kelly.

The Press Conference

Kelly believes markets will already have much to chew through by the time the press conference begins.

"Any concerns over GBP strength will resonate, but we remain committed sterling bulls from a strategic perspective," says Kelly.