Pound’s List of Risks Is Getting Shorter With BOE Saga Over
Pound Gains After Bank of England Holds Rates Steady
(Bloomberg) --
Another of the pound’s biggest threats got struck down after the Bank of England refrained from cutting interest rates Thursday.
Sterling bulls took heart from the fact that there were only two dissenting doves on the nine-member monetary policy committee, leaving the vote split unchanged, alongside benchmark interest rates. The currency advanced as much as 0.6%, bonds erased gains, and the pound saw its implied volatility fall across most tenors.
And after the decision, money markets no longer fully expected a reduction this year.
The BOE’s call follows several weeks of better-than-expected economic indicators, including PMI readings and business sentiment surveys. Coupled with Boris Johnson’s decisive U.K. election victory less than two months ago, there aren’t as many immediate risks weighing on the pound.
“Improving U.K. domestic data should be a bigger driver than Brexit negotiations in the first half of the year,” said Adam Pickett, foreign-exchange strategist at Citigroup Global Markets. “FX should rally further as investors become more comfortable with moderating Brexit risk premia.”
It’s Going to Be Quiet
Expectations for swings in sterling over the next month have fallen to the lowest level since July, as the remaining pound-specific risks -- notably the Dec. 31 deadline for Brexit-trade negotiations -- move further out into the year.
Even in the longer-term, most banks remain bullish on sterling, with a median forecast compiled by Bloomberg of $1.35 by year-end. That’s about 3% above current levels.
“It’s definitely a ‘dovish hold,’ but it confirms my earlier suspicions that the BOE is a non-event central bank for the foreseeable future,” Stephen Gallo, head of European FX strategy at Bank of Montreal. “It’s all about the other levers of policy: economic and fiscal.”
Policy makers signaled that easing may be needed soon, cutting their economic forecasts to the lowest level since the global financial crisis and predicting that inflation will only return to target by the end of 2021 if rates are cut to 0.5% in the next year.
“We are firmly in the data’s hands once again,” Michael Metcalfe, the global head of macro strategy, State Street Global Markets, said by email. The decision reflected a “data-dependent neutral policy stance,” he said.
To contact the reporters on this story: Greg Ritchie in London at gritchie10@bloomberg.net;Anooja Debnath in London at adebnath@bloomberg.net
To contact the editors responsible for this story: Dana El Baltaji at delbaltaji@bloomberg.net, Michael Hunter
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