However, even as rates held at 5.25%, the BOE left all options on the table and attempted to send out a hawkish vibe. The Bank upscaled the rate of quantitative tightening from £80b to £100b per annum to accommodate a larger bond maturity profile next year. A tightening bias was also maintained in the statement with the MPC repeating the message that “further tightening in monetary policy would be required if there were evidence of more persistent inflationary pressures”.
However, growth outlook appeared more dire with third quarter GDP expected to “rise only slightly” vs. 0.4% growth predicted in August and risk of a recession in the winter is evident. In fact, ahead of today’s release, BOE hinted that it looked at the PMIs which sets a bearish tone as the release comes out today. Market still expects another rate hike with 70% probability, but the big question is what can bring that. Perhaps a big turnaround in services inflation or wage pressures should remain at the core of that expectation, but the central bank image could get hurt if data trends diverge again from their thinking so quickly. Focus is likely to remain on higher-for-longer, rather than taking interest rates any higher from here unless conditions change materially.
In terms of who cuts rates first among the major central banks, market is pricing the first full rate cut from the Fed and ECB in July, but from the BOE only in late 2024. This suggests that risks of dovish repricing remain the highest for the GBP.
Market Takeaway: GBPUSD broke below the key 1.23 support to drop to near 6-month lows of 1.2239. A close below 1.23 today could bring the next support of 1.2175 in focus. EURGBP could target 0.88 if it closes above 0.87 this week.
SNB’s surprise pause vs. further tightening in the Nordics
Among other major central banks yesterday, the Swiss National Bank paused in a surprise move while Riksbank and Norges Bank announced 25bps rate hikes.
For the Riksbank, inflation and weakness in SEK still remain key concerns. As the hike was expected, it had an initial negative impact on SEK which was somewhat offset later by the announcement on FX reserve hedging to start in September. Riksbank announced it will sell USD 8bn and EUR 2bn for its forex reserves in the next four to six months. This is a preemptive move with the aim of limiting the losses if the krona appreciates. It was reiterated that it does not have a monetary policy purpose, although some see it as an FX intervention. EURSEK stays near recent highs at 12.00 and may remain exposed to any dovish data releases that reduce the probability of another rate hike.
Meanwhile, CHF weakened on Swiss National Bank’s surprise pause, but recovery remains likely, especially on the cross EURCHF, as a hawkish bias is easier to maintain when interest rates stay on hold. More importantly, the SNB continues to pursue a policy of keeping real exchange rate stable and would likely continue to sell FX to boost CHF. A strong dollar environment would potentially give greater room for the CHF to appreciate on the crosses. Swiss franc is also a key hedge for recession.
Market Takeaway: Central bank decisions have exposed SEK but left room for CHF appreciations. CHF/SEK cross could rise towards recent highs of 12.60.