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- Hawkish tinge expected from Bank of England 'Super Thursday'
- Could fuel Sterling's recovery
- But Brexit remains key driver, any moves likely to be limited
The Pound is the outperformer in global FX on Thursday, October 01 with markets repositioning exposure to the currency on expectations that a Brexit deal is more likely than not by year-end.
The gains - amounting to over a percent against both the Dollar and Euro over the past 24 hours - come ahead of a key event in Sterling's calendar which comes in the form of the Bank of England's November Inflation Report.
The Inflation Report is released alongside the decision of the November Monetary Policy Committee (MPC) meeting which decides on where interest rates should be, the confluence of events on Threadneedle Street give rise to the term 'Super Thursday'.
But, will it be super for Sterling?
Right now Brexit negotiations are front and centre for the Pound and therefore we would expect any knee-jerk reactions to the BoE event to be time limited in nature and bounces and falls to be faded.
That said, the nature of recent data suggests on balance there is good reason to expect the event to be a positive one for Sterling.
"Given the tight labour market in the U.K., and somewhat elevated global price pressures, there is probably more upward pressure on U.K. inflation than Eurozone inflation in the short-term. That may give the Bank of Inflation report a slightly more hawkish feel than some expect," says Kit Juckes, a foreign exchange strategist with Société Générale in London.
This could help the Pound-to-Euro exchange rate in particular as Juckes argues that "should the U.K. does get a ‘soft Brexit' deal, rates are likely to rise well before they do in Frankfurt. That can help GBP."
Currently markets are expecting perhaps one interest rate rise in 2019; should that expectation be cemented to a 'sure fire' interest rate rise, Sterling should rise. Should markets go one step further and start pricing in a second rate rise, Sterling could well extend higher.
Indeed, we heard from a number of analysts that two interest rate rises should be expected in 2019 following this week's pro-growth budget. However, markets are yet to catch up with this view.
Don’t place weight on the MPC's forecasts today. They will be based on govt’s old fiscal plans and a week-old market-implied path for Bank Rate, which since has fallen. The minutes and Carney’s statement will be more important; hawkish tone unlikely given ↓mkts and econ. surveys pic.twitter.com/8ib9k7DHZy— Samuel Tombs (@samueltombs) November 1, 2018
U.K. economic data released over the past month has been on balance better than expected, with wages, excluding bonuses, delivering an impressive 3.1% growth in August, ahead of a previous reading of 2.9% and a consensus forecast for 2.9%.
This suggests inflationary pressures in the U.K. economy are building up, something the Bank of England would feel inclined to respond to by raising interest rates, and higher interest rates attract foreign capital inflows which in turn boosts the value of the Pound.
However, inflation numbers are a fly in the ointment; the Office for National Statistics reports that headline inflation read at 2.4% year-on-year in September, down on the previous month's 2.7% and below consensus forecasts for a reading of 2.6%.
This could give the Bank of England the excuse it needs to strike a cautions tone in order to keep interest rate expectations steady heading into the crucial end-game for Brexit negotiations. The Bank will figure now is not the time to shake expectations.
What to Watch
There are a few triggers to Sterling strength or weakness to watch.
The first indicator is the balance of votes for an interest rate on the MPC, this will be made known at 12:00 G.M.T.
Currently expectations are for a 9-0 vote in favour of keeping rates on hold; anything more would be interpreted as 'hawkish' and potentially aid the Pound.
The message of the minutes to the meeting will be important with a positive tone likely to stimulate demand for the Pound.
"GBP is oversold, making it vulnerable to a hawkish surprise," says James Rossiter, a foreign exchange strategist with TD Securities.
Rossiter is maintaining a base-case scenario that the MPC leaves its September message intact in almost every way.
"With projections holding up, the yield curve still pointing to one hike next year, and the currency sitting in its recent range, the MPC sees no reason to change tone. They reiterate that the yield curve remains appropriate, and that rates will rise at a gradual pace and to a limited extent," says Rossiter.
This outcome is given a 75% weighting, and could see the GBP/USD move to 1.2770 and EUR/GBP move to 0.8880.
Note that Sterling has moved a great deal since Rossiter's briefing, so we expect these targets to have aged.
"We expect its general message to be unchanged, with further gradual increases in policy rates being appropriate should the economy continue to develop in line with its forecasts," says Gajan Mahadevan, a strategist with Lloyds Bank. "It will be interesting to hear whether the Governor retains a more cautious tone, or not, at the press conference. A more buoyant tone will further support the GBP."
Concerning the outlook, Lloyds' technical strategist Robin Wilkin says GBP/USD has reversed from the 1.2660 range lows, back through 1.2850 resistance.
"This, along with momentum back in bull mode, supports our view for a move back towards the top of the 1.2660 - 1.3320 range," says Wilkin.
Concerning EUR/GBP, Wilkin says "the cross has staged a much sharper turn-around than we
expected, plummeting back from 0.8940 through 0.8840 pivotal support. We see intra-day support around 0.8770 ahead of the medium-term range lows in the 0.8700-0.8620 region."
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