Pound Pundits Puzzled by Carney Stick to Guns on May Hike

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(Bloomberg) -- Money-market traders in the U.K. may have capitulated, but not the analysts.

While currency pundits were jolted by Governor Mark Carney’s surprise hint that an interest-rate increase by the Bank of England next month isn’t a foregone conclusion, they aren’t exactly doing an about-turn on their forecasts. ING Groep NV, Nomura International Plc, Credit Agricole SA, CBA Europe Ltd., MUFG and Canadian Imperial Bank of Commerce all say they are keeping their call for a hike in May intact.

Gilts slid on Monday after rallying Friday on the repricing as money-market investors pared expectations for a rate move to around 50 percent following Carney’s remarks, from more than 80 percent earlier. Sterling is still among the top performers in Group-of-10 currencies this year, largely led by conviction that the central bank will need to raise rates to quell inflation that breached 3 percent in November.

“We still have a May hike penciled in -- and see this clear-out as a good opportunity to chase tactical pound upside into the May BOE meeting,” said Viraj Patel, an analyst at ING Groep NV. “All Carney has done has turned May from a surefire bet to a 50:50.”

Pound Trajectory

The pound traded steady at around $1.40 on Monday, having lost 1.7 percent last week, the worst five-day performance since February. Still, the currency has strengthened close to 4 percent this year against the dollar.

Pacific Investment Management Co. sees the possibility of further pound strength, according to Mike Amey, a managing director at the fund.

“We still see scope for the monetary policy committee to hold the line and hike rates one to two times in 2018 and in 2019,” said Amey. This means U.K. sovereign yields are “rich” while there is “some scope for a modest appreciation in the British pound, not least due to our expectations of a non-disruptive Brexit,” he said.

Nomura is more bullish and sees sterling ending the year higher despite Carney’s latest comments.

“For the time being, and before all of the monthly data are in, we still on balance expect the MPC to raise rates next month,” said Jordan Rochester, an analyst at the brokerage. “The MPC’s known reluctance to pre-commit may lead us to discount the importance of these comments.”

Rochester predicts the pound to strengthen more than 5 percent from here to end 2018 at $1.48, levels around which it was trading in the run-up to the Brexit referendum.

Yet not all in the street are unified in expecting a May rate hike.

“Grudgingly, we have changed our forecast for the next interest-rate move,” said Alan Clarke, a strategist at Scotiabank. “We no longer expect an increase in the May MPC meeting,” he wrote, citing recent disappointing U.K. economic data and Carney’s comments.

©2018 Bloomberg L.P.

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