Pound Sterling Outlook: "Confusion will Reign in GBP Markets" on BoE's Super-Thursday Event

“Sell GBP/$ into the BoE meeting but 1.2850-1.2900 may be the lowest we get” - Viraj Patel, ING Bank N.V.

The British Pound ended July on a respectful note against the majority of its trading partners with comparative data statistics showing gains have come against all majors except the Australian Dollar and Swedish Krona.

This will come as a relief for those hoping for a stronger currency when we consider the torrid time the UK currency endured during mid-July when fresh eight-month lows were reached against the Euro.

The big event for Sterling in early August will be the Bank of England’s policy meeting and inflation report which combine in one event.

Recall a report we published earlier in the month from Nomura that said the Bank would raise interest rates at the August meeting?

This is certainly not a consensus view but nevertheless does point to the risks inherent in the event.

A rate rise would certainly boost the Pound, but consensus are not expecting such an outcome. If anything, it could be a difficult week for Sterling.

"Odds of a BoE rate hike next week are slim-to-none in our eyes," says Viraj Patel at ING Bank N.V.

Patel does however think “confusion will reign in GBP markets given the range of conflicting policy signals that are likely to emerge from the Super Thursday event.”

“It could well be a case where the diverse policy views of individual MPC members and greater BoE transparency combine to offer little consensus on the overall policy thinking, with plenty of supporting evidence for both the market doves and hawks to stick to their a priori views,” says the analyst.

ING’s base-case is for a 6-2 MPC vote split to keep rates on hold, which in theory should be perceived as dovish given that the lack of active dissenters reduces the likelihood of a Nov hike.

This would likely result in Pound Sterling weakening.

“But this might not be enough to drive GBP materially lower – especially as BoE watchers have been accustomed to more twist and turns in recent months than a Game of Thrones season,” says Patel.

The analyst argues that what will matter for the Pound is which policy factors will prevail and whether Governor Carney’s head is turned by concerns over slowing activity and uncertainties over Brexit or whether it is above-target inflation and the costs of low interest rates in the form of emerging credit bubbles that is keeping the BoE chief awake at night.

“Sell GBP/$ into the BoE meeting but 1.2850-1.2900 may be the lowest we get,” says Patel.

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Money markets are currently offering interest rates that are consistent with expectations for no interest rate rise at the Bank of England in August.

Were the meeting to have been held in early July, Kamal Sharma at BofA Merrill Lynch Global Research says there may have been more impact for GBP given rising rate hike expectations then.

"However, sterling is probably priced for a dovish tone given the recalibration in the UK rates markets," says Sharma.

The Bank took a hawkish stance in June with a three MPC members voting for a hike, and analysts are expecting a 6-2 vote against a rate rise in August as 'uber-hawk' Kristin Forbes departs and most top-tier data has surprised to the downside since Haldane’s hawkish speech in June.

"We see some risk of a downward revision to growth, and look for caution given growing signs that falling real wages are squeezing consumers," say TD Securities in a briefing to clients.

When everyone is leaning one way a surprise that goes against consensus tends to have the greater currency impact.

So what would happen if say three or four members of the MPC vote for a rate rise? Such a surprise would be positive for the Pound.

If the language in the minutes to the policy meeting are consistent with a rate rise in the near future we could well see Sterling find some lift.

We will also be listening to Governor Mark Carney in the ensuing press conference as the tone he adopts could move markets. Recall Sterling found support in late June after Carney said a rate rise could be warranted if the economy continued to make progress. 

Markets read this as a shift in Carney's stance with the Governor now appearing more open to the idea of raising rates. Will the same Carney be present next week?

But the message to reinforce is that of Viraj Patel - confusion and choppy trade are likely to be the order of the day.