BoE: Governor Carney will Tread Carefully with Brexit - MUFG
Derek Halpenny, European Head of GMR at MUFG, suggests that on a
one-month basis, it is the pound that is the best performing G10
currency in part perhaps due to the failure of the ‘Leave’ campaign to
make any serious advances ahead of the referendum in six weeks’ time.
“The opinion polls have become tighter again after a good month in April for the ‘Remain’ campaign but ‘Poll of Polls’ have yet to ever have the ‘Leave’ side in the lead. But today will be an important day for the pound with the MPC meeting, the minutes of that meeting and the Quarterly Inflation Report all released at 12:00 London time.
One aspect markets will look closely for clues on is to what degree the BOE believes the current emergence of weaker data is down to ‘Brexit’ uncertainty and what might be down to something more serious and lasting. While ‘Brexit’ uncertainty of course may well be a factor in the weaker data of late, the BOE may well also focus on the bigger picture which is one of continued weakness that can’t be explained by ‘Brexit’ uncertainty alone.
As of the February QIR, the BOE was predicting Q1 annual real GDP growth of 2.22% with some very slight moderation in Q2/Q3 before some slight recovery in Q4. There is certainly a high risk that these projections will be revised lower. Will the BOE signal this is purely ‘Brexit’ related or will other factors also have played a role? We’re pretty sure the BOE will point to other factors as well.
On inflation, in February, the BOE forecast the annual inflation rate to reach 0.44% in Q1, rising to 0.88% by Q4. However, the actual annual inflation rate in Q1 was 0.33%. So, again, the starting point for the forecast profile ahead is from a slightly lower than expected level. However, the inflation profile is complicated by the possibility that the BOE might upgrade its view on crude oil prices which might mean this offsets the lower starting point of the profile.
The December 3-month futures contract does show there has been a notable easing in rate expectations with the implied yield down nearly 15bps since 26th April and there is certainly a risk that one or perhaps two MPC members vote for a cut in the official policy rate today.
However, it is important to note that easing rate expectations is not unique to the UK and on a G10 2-year swap spread basis, there has been little movement to justify the under-performance of the pound. That does suggest at least some element of ‘Brexit’ risk is priced despite the recovery of the pound versus the US dollar. We still expect the pound to come under renewed selling pressure in the weeks ahead and any sense today from the BOE that they are more concerned over the outlook beyond ‘Brexit’ could be a spark for renewed pound selling for more fundamental reasons.”