On Thursday the Bank of England will release its February Inflation Report, whichGoldman Sachs expects that it will deliver a modestly hawkish message to the market.
"The BoE is likely to acknowledge the weak near-term inflation outlook, but also resist some of the recent decline in market pricing of Sterling forward rates by signaling a faster return to the 2% inflation target than in the November Inflation Report," GS projects.
"We expect the Inflation Report to show inflation reaching the 2% target earlier than in the November projections, settling above 2% at the three-year horizon.While the weakness in projected near-term inflation would suggest that rate hikes are not imminent, a faster rebound in projected inflation to the 2% target may reconnect Sterling rates to domestic macro data, steepening the front-end of the yield curve as highlighted by our rates strategists,' GS adds.
GBP into QIR:
"Any such re-pricing in front-end rates higher this week would also push up GBP. Beyond this week, the bigger picture is that the positive macro outlook in the UK means the Bank of England is better placed to weather a temporary fall in headline inflation. We expect that this will be reflected not only in this week’s Inflation Report, but in strong performance of GBP vs much of the G10 through 2015," GS argues.
How to position?
"While we remain cautious on Cable given our conviction view for broad-based USD strength (we forecast 1.48 in 12 months), we continue to think that EURGBP downside remains one of the best expressions of a positive GBP view given the clear divergence in the macro outlook and monetary policy between the UK and the Euro area. We forecast EURGBP at 0.73 in 12 months, 0.70 at end-2016 and 0.65 at end-2017," GS advsies.
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