BoE Preview: Market pricing is too optimistic about rate cut

Macro

Christopher Dembik

Head of Macro Analysis

Summary:  We think that the BoE will be on hold this week and will wait for more post-election data to come in before cutting interest rates.


The market is still very divided over the outcome of the BoE meeting today. Market pricing points out to a likelihood of about 58% for a rate cut, but we still stick with our expectation for an unchanged policy rate at 0.75%.

We believe the BoE is data-dependent and will wait for more post-election data to come in before cutting interest rates. The latest data tend to confirm that the UK economy is rebounding in early 2020. January flash Purchasing Managers’ index readings were above consensus. Flash Service PMI was out at 52.9, flash Manufacturing PMI at 49.8 and flash Composite PMI at 52.4. Credit conditions have also improved significantly with availability of secured credit for households reaching the highest level since 2015. We still consider that the UK economy will need more stimulus in the coming months to offset the prolonged contraction in credit push and the five consecutive quarters of contraction in private investment but, as of now, the BoE is in no hurry to step in.

Another argument for postponing the rate cut is that it is the last meeting chaired by Governor Carney before A. Bailey takes over in March. It is likely that Carney will let Bailey make the call once more data will be available regarding the state of the UK economy in the post-Brexit era.

Strategic view: Net longs in the sterling are close to their highest level since Spring 2018 on the back of optimism regarding post-Brexit era and improved data. Further evidence of economic rebound in 2020 could encourage an extension of the stronger GBP trend that started in August 2019. Looking at the cross EUR/GBP, the technical analysis confirms that more downside is possible. The cross is currently evolving under its 50-day moving average and 200-day moving average. A potential retest of December low at 0.8363 is the next main target on the downside. If the BoE still decides to deliver an insurance cut today, the market impact could be short-lived. It would temporarily reinforce the EUR vs the GBP, but it would not fundamentally change our view that a stronger GBP is likely in the coming months.

Trade responsibly
All trading carries risk. Read more. To help you understand the risks involved we have put together a series of Key Information Documents (KIDs) highlighting the risks and rewards related to each product. Read more

Saxo Bank A/S is licensed by the Danish Financial Supervisory Authority and operates in the UAE under a representative office license issued by the Central bank of the UAE.

The content and material made available on this website and the linked sites are provided by Saxo Bank A/S. It is the sole responsibility of the recipient to ascertain the terms of and comply with any local laws or regulation to which they are subject.

The UAE Representative Office of Saxo Bank A/S markets the Saxo Bank A/S trading platform and the products offered by Saxo Bank A/S.