Sterling has been dragged down by the changing BoE rhetoric and repricing of the timing tightening cycle. Since February weak economic data ended the all-but-sure May rate hike. Yet, expectations of monetary policy strategy has become worryingly short sighted, data dependent in our view. Today mixed labor market data, growth rising 2.9% weekly earning x-bonus yet softer 2.6% average weekly earnings will spark debate. Data indicate only now responding to soft patch. Give the sharp decline in sterling we suspect that positive news will have a larger effect on pricing then negative reads. In addition, evidence of inflation will more likely trigger expectations of higher interest rates then sluggish growth. A widely expected at recent policy meeting, the MPC left the Bank Rate unchanged at 0.5% with Committee voting 7-2.
The BoE has acknowledged the recent weakness (which is consistent with broader global slowdown) in growth and inflation data (waning FX impact) but the door remains open for August hike. We understand the MPC comment is that express concern over the strength of the economy and see the bar for future rate hikes as high. However, dovishness is overpriced. As marginal recovery, bounce takes place markets will quickly reload on GBP long (German ZEW current situation rose to 87.4). In the longer term, much depends on Brexit and direction of free trade negotiations. Our based scenario is for EU-UK friendly outcome. We are positioned for a positive swing in oversold GBP on either good news on Brexit or pickup in domestic data.
By Peter Rosenstreich