- GBP a potential buy near current levels
- Bank of England holds interest rates
- Prompting selloff to accelerate
- But Nov. rate hike still likely says Monex
- This can aid GBP, particularly vs. EUR
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The Pound could be approaching attractive levels for buyers according to a new analysis that follows another sharp decline in the currency, this time in response to the Bank of England's decision to hold interest rates unchanged at 5.25%.
International payments company Monex says the Bank's decision to hold rates doesn't necessarily mean the hiking cycle is complete as it might have to walk back on what appears to have been a 'dovish' decision that flies in the face of elevated inflation and a tight labour market.
"We think this may be opening up a decent buying opportunity in the currency," says Nick Rees, FX Market Analyst at Monex Europe.
The decision itself was not the key contributor to the Pound's decline, rather it was the guidance from the Bank that it wasn't in any particular hurry to raise interest rates again, prompting the market to lower its expectation for a November interest rate rise.
"For sterling, much has been made about the recent decline in UK terminal rate expectations and the impact that has had on dragging the currency lower. While the pound has continued to slump again today as markets react to the BoE’s decision to hold... we think this may be opening up a decent buying opportunity in the currency," says Rees.
The call comes as the Pound endures a multi-week selloff against both the Dollar and Euro: the Pound to Euro exchange rate fell to a low of 1.1504 in the wake of the Bank's decision, Sterling-Dollar meanwhile went as low as 1.2236.
But Rees says, "there remains a path higher for sterling on the basis of another rate hike in November and a string of constructive growth data."
Backing the decision to keep interest rates unchanged was the influential pair of Governor Andrew Bailey and Chief Economist Huw Pill, who said earlier this month they see the end to the hiking cycle approaching and that rates would need to stay at these levels for an extended period of time.
"We are not confident that this is the case," says Rees. "Not only does the fine vote split and the continued view that risks to the BoE’s inflation forecasts remain to the upside suggest that further rate hikes may be forthcoming, but so does the inconsistent readthrough across the aggregate data."
Above: GBPUSD (top) and GBPEUR at daily intervals, showing a recent loss of value.
Monex join other institutions that are baffled by the Bank's apparent decision to outright dismiss the latest ONS jobs data that showed wages were running well above levels consistent with a timely return of inflation back to the 2.0% target.
The Bank stated, "the recent path of the Average Weekly Earnings (AWE) is, however, difficult to reconcile with other indicators of pay growth."
Regular private sector wages grew by 8.1% 3m YoY in July, down just 0.1pp from the June figure of 8.2%.
"Not only this, but Bank staff forecasts has projected pay growth on this measure to fall from 7.6% in June to 6.9% in September, a decline that has no prospect of being achieved," says Rees.
"The Bank’s decision is perplexing given the emphasis they had placed on a downturn in this measure as a precondition for pausing their tightening cycle, only to discredit it in determining today’s decision," he adds.
Monex thinks the November rate decision offers another window for the Bank to raise interest rates as it will be accompanied by another set of forecasts in the Monetary Policy Report.
"Our conviction in this call is notably greatest against the euro, where we believe the ECB faces a difficult policy environment," says Rees.