BoE: Growing air of expectation that the committee will lower the Bank rate this week - ING

Research Team at ING, suggests that the first post-Brexit MPC meeting (Thu) will take centre stage and there is a growing air of expectation that the committee will lower the Bank rate this week (markets are pricing in a 64% chance of a 25bp cut).

Key Quotes

“While our economists see a small possibility that the BoE could remain on hold, given the lack of economic data since the referendum and limited policy ammunition, we narrowly favour the MPC to press ahead with a 25bp cut this week.

Nonetheless, we acknowledge that it is a close call and were the BoE to disappoint markets, we think that any GBP rebound will prove to be limited and short-lived for three reasons: (i) our models suggests that BoE easing expectations have accounted for around 2% of the post-Brexit move lower in GBP/USD, with price action being largely driven by heightened GBP risk premia; (ii) dovish forward guidance in the statement and minutes will signal that further easing (ie, QE) is on the horizon; and (iii) a lack of short builds in the latest CFTC positioning data implies that real money investors have been behind the recent GBP selling (as opposed to speculative bets).

With markets only pricing in 35-40bps worth of total BoE easing, we think that a very dovish MPC (one that entertains further rate cuts and QE) will see the UK curve fall further, thus weighing on GBP. We prefer to sell GBP/USD this week on the back of diverging monetary prospects and target a move towards 1.2700.”