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BoE policy expectations to take back seat to Brexit risk - MUFG

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Feb 4, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Lee Hardman, Currency Analyst at MUFG, notes that the pound will be impacted today by the BoE’s latest monetary policy meeting and subsequent release of the accompanying statement, minutes and Quarterly Inflation report.

    Key Quotes

    “We expect the overall policy tone of the BoE to be cautious and dovish reflecting heightened uncertainty given negative external risks and the upcoming EU referendum. There is a risk that the lone hawk MPC member McCafferty could drop his vote for a rate hike. Since the BoE’s last Quarterly Inflation report from November, economic growth has been a little softer than expected and downside risks to the outlook for growth have increased. Further weakness in the price of crude oil has increased downside risks to inflation in the near-term.

    However, the pound has weakened sharply recently and the interest market has significantly scaled back tightening expectations with no rate hike expected until 2018. There is also some risk of a rate cut discounted for later this year. The weaker pound and lower interest rates could result in the updated projections showing inflation overshooting their target over the policy relevant horizon by more than projected in November. It could provide pushback from the BoE against current market pricing although they are unlikely to push back strongly in the current environment potentially offering only modest support for the pond. Brexit risk is likely to be the main driver of the pound ahead of the EU referendum as BoE policy expectations become more of a side show.”
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