Pound `Clinging' Onto Hawkish BOE With ING Eyeing 7-2 Vote Split

(Bloomberg) -- Investors looking to trade the pound after the Bank of England decision on Thursday may just need to answer one simple question: are all the policy makers singing from the same hymn sheet?

While money markets are betting officials will keep their stance on hold at this meeting, investors will look for any split among Monetary Policy Committee members to determine the chances of an interest-rate increase later this year. ING Groep NV’s currency strategist Viraj Patel said sterling is “clinging on to a hawkish BOE.”

Pound `Clinging' Onto Hawkish BOE With ING Eyeing 7-2 Vote Split

ING’s base case is for two of the nine MPC members to dissent and call for higher borrowing costs at the decision at noon in London, and for the central bank to downplay soft economic first-quarter growth and signal that a rate increase later this year is still in the cards. In that “hawkish hold” scenario, Patel sees the pound climbing toward $1.36.

However, depending on the voting pattern, the pound could rally more than 2 percent or fall 1.4 percent from around $1.3545 now, according to ING. If officials unanimously maintain borrowing costs at 0.5 percent, a “dovish hold,” the pound could drop toward $1.3350, Patel said. Alternatively, if the BOE went against economists’ forecasts and market pricing to lift rates sterling could jump toward $1.3850.

A “subtle hawkish surprise” would be a 6-3 split, which will support speculation of an August hike, Patel said. Money markets currently fully price a rate increase by November.

For Patel, sterling at $1.35 “looks overcooked relative to the more tempered BOE policy rate expectations.” Positioning and limited sentiment for further downside means “risk-reward favors sterling-dollar upside going into the May BOE meeting,” he said.

“What matters for the pound is whether Governor Carney is a man with or without conviction over future rate hikes,” Patel said.

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