BoE Preview: Silence is Golden - ING
James Knightley, Senior Economist at ING, suggests that BoE’s dovish
tilt in its forthcoming meet may unleash pent-up GBP weakness.
Key Quotes
“Loss
of UK economic momentum has been sizeable. All three PMI surveys
released last week came in at their lowest levels since early 2013,
implying that 2Q16 GDP growth might be the slowest since 2012.
Uncertainty over the outcome of the EU referendum is surely playing a
role, with firms reported to be delaying hiring/investment decisions
until after the vote. Should the UK vote to remain in the EU, then we
would expect activity to bounce back. However, given that (a) the jury
is still out on whether the referendum is the only factor behind the
slower activity and (b) the slowdown has been much sharper than
anticipated, any meaningful recovery may not be evident until the late
4Q16 data.
BoE faced with the tricky task of downgrading outlook
whilst staying apolitical. Following the MPC’s warning last month that
there might be “some softening” in 1H16 growth, we suspect the Bank’s 2Q
GDP estimate will be revised lower in light of the soft data (INGF:
0.3% QoQ). Beyond this, the BoE will be challenged to come up with a set
of forecasts that sidesteps taking a view on the referendum outcome; we
think the likely tact will be to leave the GDP and CPI profiles broadly
unchanged from 3Q16 onwards. Any dovish signals at this week’s meeting
are more likely to be expressed qualitatively.
Murmurings of a
BoE rate cut this week seem a bit wide of the mark. With the Apr minutes
paying particular attention to financial conditions, we suspect the MPC
will be wary of provoking volatility ahead of the referendum and will
look to avoid opening the Pandora’s box on prospects for additional
near-term easing.
GBP brushed off the weak UK data in April; BoE
meeting might be the catalyst for pent-up weakness to manifest. Despite a
sequence of hefty negative surprises over the past month, we note that
typically data-sensitive GBP pairs (eg, cable) have been remarkably
dismissive of the weaker UK data. Our data surprise analysis shows that
there could be around 1.5-2.0% worth of pent-up downside in cable due to
the deterioration in the UK fundamental outlook; a more dovish MPC (ie,
one that acknowledges the slowdown in activity) might see part of this
GBP weakness transpire.
GBP implications: The
initial shift in global risk sentiment in recent months (from bearish to
tentatively neutral) has been a positive driver for GBP, accounting for
more than half of last month’s recovery. But signs of a stabilisation
in risk appetite (as opposed to new found optimism) means that this risk
impulse is beginning to fade. Instead, the focus is shifting back to
the upcoming EU referendum (23 Jun), with the respective campaigns
picking up this week following the end of local UK elections. While
betting market odds for a Brexit have been nudging higher (currently
around 30%), they still remain some way off what opinion polls are
showing (the Bloomberg composite poll tracker puts the outcome in the
balance). We suspect that betting market odds will slowly converge
towards polls.
Look to sell GBP/USD ahead of the BoE meeting,
with a dovish confirmation likely to see some pent-up GBP weakness
emerge. Short GBP/USD would be the preferred vehicle to express a
bearish GBP view were US yields start to pick up on the back of solid US
data. We continue to expect a move below 1.40 ahead of the referendum
(23 Jun).”
