BoE Preview: Market pricing is too optimistic about rate cut
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.
Quarterly Outlook Q2 2022
Quarterly Outlook Q2 2022: The End Game has arrived
- Shocks from covid and the war in Ukraine have forced the global financial and political world to change, but what will the end game be?
Energy crisis could turn energy stocks into secular winnerWith long-term expected returns for the global energy sector close to 10%, we look at 40 stocks that could be set to cash in.
The great EUR recovery and the difficulty of trading itIf the terrible fog of war hopefully lifts soon, the conditions are promising for the euro to reprice significantly higher.
Tight commodity markets – turbocharged by war and sanctionsWith supply already tight, commodities keep powering on. But will it last for yet another quarter?
Between a rock and a hard placeGeopolitical concerns will add upward price pressures and fears of slower growth, while volatility will remain elevated.
The Great ErosionInflation is everywhere and central banks try to combat it. But will they get it under control in time?
Australian investing: Six considerations amid triple Rs: rising rates, record inflation and likely recessionWhile global financial markets are struggling in an uncertain world, the commodity-heavy Australian ASX index is poised to keep a positive momentum.
Cybersecurity – the rush to catch up with realityWith the invasion of Ukraine, governments and private companies are rushing to reinforce their cyber defenses.