Today, the BoE kept its monetary policy unchanged as expected. The BoE left the door open for more easing later this year if data meet expectations of the August projections. However, the BoE signals that the probability has declined, as near-term indicators have been better than expected.
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We maintain our view that the BoE will cut the Bank Rate by 15bp from 0.25% to 0.10% in November, but it is a close call and will largely depend on economic data in the coming months. It is noteworthy that the BoE focuses on activity indicators and not inflation as it accepts that inflation may overshoot target to support economic activity in coming years. The market is currently pricing in a 6bp rate cut at the November meeting and 11bp in total in a year’s time.
We still expect EUR/GBP to trade higher in the coming months. Our forecast of a weaker GBP is driven not only by BoE easing but also by the considerable imbalances in the UK economy, not least the significant current account deficit. In addition, net foreign debt accumulated through several years of current account deficits has made the GBP very fragile. The political uncertainty stemming from the forthcoming Brexit-negotiations will also weigh on GBP.
Danske maintains a long EUR/GBP from 0.8374 targeting 0.90.*