Is the Bank of England’s hawkish tilt an inflection point for sterling?

Payton Lee

Singapore Sales Trader

The Bank of England meeting last Thursday was a hawkish surprise which caught our attention, especially with Andy Haldane, the chief economist, being the surprise dissenter.

Cable traded from a low of 1.310 to 1.332 last week:

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Source: Bloomberg, Saxo

Bank of England – implications

  • BoE officials voted 6-3 in favour of maintaining rates at its monetary policy committee meeting.
  • Ian McCafferty and Michael Saunders were the known dissenters from the last meeting and McCafferty has been caught on the wrong foot with his hawkish tilt a few times in the last three years. Also, McCafferty will be leaving the BoE by the end of August. It would have been easier to discount the two dissenters again.
  • The possibly game-changing split in vote is not because of the numbers alone (6-3) but the fact that the third dissenter happens to be the chief economist Andy Haldane.
  • The odds of a rate hike in August have jumped from 48% before the meeting to 70% right now.
  • To give a sense of perspective, back in September 2015 when Carney was drumming up the prospect of the rate hike cycle being around the corner, Haldane was the first BoE official to explicitly warn the market that the rate move could either be a hike or a cut, highlighting the uncertainties clouding the economy despite the sharp improvements in labour data.
  • Things are certainly different this time. But after the May U-turn from building up a hike to backing off on a soft CPI cue, the BoE would want to get back on track to essentially trying to mimic the Federal Open Market Committee’s gradual exit from quantitative easing and low interest rates.
  • While Brexit uncertainty still looms large the economic data is still holding up well to warrant gradual hikes, which, contrary to the general perception of being a choke on growth would in fact provide greater policy flexibility in case of a slowdown at a later point in time.
  • There was also another hawkish hint in the policy as the statement hinted that the hurdle interest rate to consider tapering the QE was brought down from 2% to 1.5%.

Key take-away:

Brexit risks remain very much alive with no sign of an agreement on any of the key parameters even within the UK political landscape, let alone with the EU.

Keeping that aside, Haldane’s hawkish switch paves the way for some clarity of the BoE’s policy path ahead – unless some dramatic slowdown occurs. That the hawkish tilt came in the wake of further softer CPI prints since March tells us that the BoE is looking at policy normalisation from a slightly longer timeframe.

All things considered, Andy Haldane’s hawkish tilt could yet prove to be a pivotal point for sterling over the medium term. Purely considering how important a fundamental cue it is and how much the market corrected from when BoE was expected to hike in May but eventually tracked back (1.4377 to 1.3102), and that the critical support at 1.3050 remains intact, the pair offers an attractive risk-reward to build long positions for the medium term.

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