GBP Strategy for Bank of England Super Thursday: Goldmans, Danske, Credit Suisse, Credit Agricole

Today’s ForecastsNow report brings a roundup of the latest strategy viewpoints from some of the world’s leading names in FX.

Analysts at Goldman Sachs have updated their clients with where they see the Bank of England going on Thursday.

A look at a research note on the matter, provided by institutional research providers eFXNews, shows Goldman Sachs’ UK economist Andrew Benito expects:

(i) a 25bp cut to Bank Rate, with a 30% probability that the BoE cuts Bank Rate by 40bp,
(ii) the announcement of £100bn of purchases of government and corporate bonds, distributed over a period of 6-months, and
(iii) a very dovish MPC significantly downgrading UK growth and providing forward guidance on the future path of policy.

How does this translate into market reactions?

A note published by Goldman Sachs Macro Markets Strategy team suggests the Pound will ultimately move lower:

“While the rate cut is fully discounted in the forwards, we think there is scope for the currency to weaken as the other elements of the policy package are announced and the BoE updates the economic and inflation outlook.

“An expansion of the asset purchase facility by £100bn, approximately equal to 10% of UK GDP on an annualised basis, would be a sizeable surprise relative to market consensus, which we estimate at around £50-75bn.

“While Sterling shorts are sizeable – a potential source of vulnerability to our view – we have showed that speculative positioning for the Pound historically has been a leading (not a contrarian) signal.

“Sterling fell by about 11% in trade-weighted terms right after the vote on EU membership. But, contrary to our view of further weakness, the Pound has traded in a narrow range since the new government has been in office.”

Over the next 3- to 12-months, Goldman Sachs say they are comfortable with their view that the slowdown in economic activity will drive the currency lower, they forecast £/$ at 1.20 and 1.25 and EUR/£ at 0.9 and 0.80 in 3- and 12-months, respectively.

Credit Suisse: The Bar to Easing Remains High, GBP/USD to go Higher

Bhaveer Shah at Credit Suisse argues that the bar for the BoE to deliver on expectations seems high.

“This is most visible in the way UK assets outside of FX have rallied over the last fortnight.

“Anticipation for asset purchases has pushed UK 10y yields yet another leg lower this fortnight, while UK corporate bond indices have rallied significantly over July. It is only in the last two days that UK fixed income markets have retraced some of these gains, as anxiety about a BOE disappointment has grown.

“Even economists’ forecasts for this meeting seem bold. Around half now expect QE to be announced as soon as this meeting, compared to just 3 of 43 for the July meeting. Potential corporate bond buying and further Funding for Lending has already gathered traction.”

“A short and small pop higher in GBPUSD to 1.36 after the meeting seems plausible. Beyond the 1.36 level in GBPUSD, we expect selling pressures could intensify. After all, structural, political and economic factors still limit the extent to which sterling appreciation can be sustained.”

Danske Bank: EUR/GBP to Head Higher

Danske Bank’s FX Strategy team say they expect the BoE to cut the Bank Rate by 25bp to 0.25% (0.50%). This is roughly in line with consensus (0.25%) and market pricing (a little more than a full cut is priced in).

“Moreover, we expect the BoE to restart its Asset Purchase Facility (APF) programme (QE) by buying sovereign bonds of an additional GBP75bn. Market expectations are already high: a 25bp rate cut is fully discounted and QE is also to some extent priced in,” says the note.

Concerning the EUR/GBP outlook in the context of the event, Danske say:

“We expect EUR/GBP to move higher on the announcement despite relatively high market expectations, as we expect the BoE to maintain a very dovish stance, which should help underpin market expectations of additional easing further down the road.

“We forecast EUR/GBP at 0.86 in 1M. − Over the medium term, we think that more GBP weakness is in store: we target 0.88 in 3M and 0.90 in 6M.”

Credit Agricole: Bank of England to Struggle to Deliver

Research from Credit Agricole, provided to us via eFXNews, shows analysts at the French bank believe there is a lot of risk premium priced for the BoE/QIR this week:

“The forward implied overnight vol for the event is worth around 30 vols, this equates to around a 1.7 big figure move for the overnight ATM straddle.

“We believe the MPC will struggle to exceed the already dovish market expectations and as such the options market likely reflects risks that the BoE will disappoint.

“We expect the BoE to deliver a 25bp cut and given the BoE’s comments at the July meeting, it would be difficult for the Bank to not deliver some form of stimulus, as such options pricing is perhaps a little elevated.”