Brexit looming larger than BoE 'Super Thursday'

The Bank of England Super Thursday (decision, minutes, quarterly inflation report, and Governor Carney presser) today is the immediate focus for sterling, and comes with near-universal expectations for a “dovish hike” that will see little shift in forward guidance. 

Driving the decision to hike have been higher CPI and especially wage inflation. UK rate expectations have actually picked up over the last week, but this may be more linked to hopes that the Brexit narrative could soon reach a breakthrough rather than anything the BoE will say today. At the margin, a single dissenting vote is hawkish at the margin, as opposed to the expected two dissenting votes.

In other UK news, there are signs of a thaw on the EU side in Brexit negotiations. The EU’s Barnier has been given more flexibility to negotiate a deal and that there may be a method to avoid a “cliff edge” Brexit. The FT ran a story (paywall) this morning discussing a shift in Merkel’s stance (possibly as with the immigration issue) prompted by CSU leader Seehofer’s objections to Barnier’s inflexible constraints. 

Prime Minister May will meet with Macron tomorrow, and headlines from this meeting have the potential to put sterling on a recovery path if he also shows signs of a thaw in his stance. The FT article points out that the geopolitical backdrop from the EU perspective has shifted considerably since the Brexit vote, with Europe looking more isolated due to the weakening goodwill within the Nato alliance driven by the spectre of the Trump presidency. 

Security considerations, i.e. the UK’s more robust (relative especially to Germany) military presence, loom perhaps as large as economic considerations in weighing likely Brexit outcomes.

The Turkish lira suffered a fresh bout of weakening yesterday as the US announced sanctions on Turkish government officials on Turkey’s handling of a US pastor on Turkish soil. Turkish president Erdogan is striking the usual defiant stance – no surprise there. Concerns on the viability of Turkey’s finances given the political and the structural backdrop of Turkey’s foreign currency-denominated exposure could continue to drive TRY weaker, and default odds have ratcheted to new highs this morning, with the Turkish sovereign CDS’ trading near 340 points.

Chart: EURGBP

Is something brewing in sterling? The recent marginal drop in sterling versus the single currency on Brexit uncertainties has dominated the narrative recently, but real progress on Brexit driven by a shift in the EU’s approach could finally throw sterling a rope here.