Hawkish Bank of England Means Potential for More Sterling Gains

  • ‘Aggressive wording’ sees JP Morgan AM bet on May rate hike
  • Toronto-Dominion prefers buying sterling versus euro

Carney Says BOE May Tighten Earlier and to a Greater Extent

The pound may continue to rally after the Bank of England gave bulls what they wanted.

Sterling climbed above $1.40 on Thursday as the BOE said it may have to raise rates faster and sooner than expected previously. Money markets now see a 79 percent chance that the BOE will lift borrowing costs in May, a move JP Morgan Asset Management is betting on. A May hike is “in play”, said Jane Foley, head of currency strategy at Rabobank.

Here’s what analysts said about the BOE’s latest meeting and U.K. assets:

JP Morgan Asset Management

  • “That was some pretty aggressive wording” from the BOE, says chief market strategist for the U.K. and Europe Karen Ward in an interview
  • “The Brexit negotiations could be a game changer as always but assuming that remains constructive we should expect them to hike rates in May”
  • JP Morgan previously saw the BOE raising borrowing costs in the latter half of the year
  • “Sterling is up 1 percent, which suggests a great deal of optimism that this is the right thing for the U.K. economy”

Credit Agricole SA 

  • “The BOE report was seen as more hawkish than expected by the markets,” says Valentin Marinov, head of G-10 currency strategy, in emailed comments
  • A rate hike in August is now seen as a “done deal”
    • “Given that the pound was trading at a discount versus U.K. rates, there could be more upside for the currency”
  • Also encouraging for pound bulls that the bank has shifted from worrying about “stagflation” on the back of a weaker currency to inflation risks amid a tighter labor market

HSBC Holdings Plc

  • HSBC has been betting on a May interest-rate increase for a while, says global head of currency strategy David Bloom on Bloomberg TV
  • “The central bank has given us fair warning another rate hike is coming”
  • “We thought the risk reward was to buy sterling into the event, so there’s trading opportunities, but ultimately I’d be selling sterling right here right now”
  • “We’re still worried it’s the weakest-performing G-10 economy, we’re still worried it’s got a big budget deficit and current-account deficit and politically there’s still issues with Brexit”

Mizuho Bank Ltd

  • “It’s not so much a surprise, and flows with the general world central banking theme of increased inflation concerns,” says head of hedge fund sales Neil Jones in emailed comments
  • It’s “pretty risky” that the BOE appears to be betting on a smooth Brexit
    • “It should send the pound lower in time” if a hard Brexit starts looking like the only option
  • “Frankly, the ultra-cheap currency generated much of the inflation, which should abate, so I’m not that hawkish”

Societe Generale SA

  • “Three hikes over three years and CPI still above target suggests yields need to rise a little,” says fixed-income strategist Jason Simpson in emailed comments
  • Current 10-year gilt yield forecast of 1.6 percent by the third quarter “predicated on no rate hikes this year”

Toronto-Dominion Bank

  • The BOE “seems more confident” in its outlook, though “whether or not the U.K. economy can actually sustain an increase in policy rates against the backdrop of ongoing macro and political risks remains an open question,” says Ned Rumpeltin, European head of foreign-exchange strategy
  • The markets are going to “quickly converge to our longstanding expectation for a May rate hike -- and may even begin to price in a second for later this year,” he says in emailed comments
  • Prefers to buy the pound against the euro
  • A break below 0.8685 in euro-pound could see the pair “revisit the lows around 0.8350” by the time of the BOE’s Inflation Report in May
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