(21 JUNE 2019)DAILY MARKET BRIEF 2:Brexit: BoE pricing in best-case scenario

(21 JUNE 2019)DAILY MARKET BRIEF 2:Brexit: BoE pricing in best-case scenario

21 June 2019, 14:37
Jiming Huang
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Not much surprised on the front of pound sterling. GBP benefitted from a short-lived gain as the Bank of England maintains its intention to raise interest rates while holding its bank rate unchanged at 0.75%. Although BoE Governor Carney confirmed an existing mismatch between the central bank optimistic scenario and financial markets’ alternatives concerning Brexit transition, we see confirmation that the BoE struggles to convince investors that an increase in borrowing costs is the right path to consider.

The BoE has been favoring a hawkish bias, raising interest rates two times since Brexit low of 0.25%. Yet uncertainties over Brexit have been limiting its room of maneuver. Elections of a new Prime Minister by Conservatives is becoming clearer, as the two candidates, former and current Foreign Secretary Boris Johnson and Jeremy Hunt, are participating to the final contest starting on the week beginning 22 July 2019. Whereas Jeremy Hunt owns a similar line to that of PM May, surveys tend to support Brexiteer Boris Johnson, increasing risks of a hard Brexit and acknowledging the view that short-term GBP gains should turn negative when BoE will be changing language towards a more neutral stance thereafter. Recent survey published by EY confirms that investor sentiment is declining in the country as half of the members of financial companies surveyed believe that the attractiveness of the United Kingdom will decrease in the next three years amid concerns relating to loss of EU markets access and labor mobility restrictions. Considering current events, we see little arguments in favor of a rate hike this year. May CPI has turned back to 2% (prior: 2.10%) and is less likely to accelerate in current economic environment. We recommend a bearish bias on GBP/USD in current settings.

By Vincent Mivelaz


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