GBP gains as BoE signals higher rates

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  • ·         British pound gains momentum as the Bank of England outlines the need for a quicker than previously thought rate hike
  • ·         BoE lifts GDP forecasts for this and the following year, CPI projections increased as well 
  • ·         GBP rallies in the aftermath of the verdict crossing briefly a 1.40 handle 

 

The Bank of England held interest rates unchanged as widely expected but it decided to send a hawkish remark with regard to the first rate increase. As a result, the British currency gained a foothold immediately becoming the best performing one amongst its peers in the G10 basket.

Key remarks from the statement:

 

  • ·         BoE votes 9-0 in favour of keeping rates at the same level (as expected)
  • ·         GDP and CPI projections lifted for this and the next year (take a look at the table below)
  • ·         BoE sees excess demand building in the economy from early 2020
  • ·         NAIRU forecasts cut from 4.5% to 4.25% suggesting almost no slack there (the current rate stands at 4.3%)
  • ·         fresh forecasts based on 3 rate hikes already priced in over the next 3 years
  • ·         economy will need some ongoing withdrawal of stimulus

 

On the face of it, there are solely hawkish phrases which seem to be a bit misleading given the macroeconomic data we were offered. One of the most crucial remark is the increased need for the first rate hike compared to November 2017 predominantly on the back of diminished slack in the economy (notice that the Bank slashed its NAIRU projection just a notch below the current rate implying almost no spare capacity).

 

BoE revises up its GDP and CPI forecasts for this and the following year suggesting inflation being above the target in the prolonged period of time.

 

On top of that, the Bank chose to lift both GDP and CPI estimates for 2018 and 2019 leaving them unchanged as far as 2020 is concerned. The most striking point is inflation being forecast still above the target even beyond 2020, which could have been a prime reason why the Bank decided to tweak its communique. Moreover, GDP projections were lifted alike despite quite mediocre growth over the course of the past year compared to major G7 peers.

 

To sum up, today’s decision took many investors by surprise, however, it seems to be unlikely to be a longer-term driver for the GBP if the data remains sub-par. Having said that, while the pound could enjoy increased demand in the short-term (at the broad market) its long-term backdrop will depend on the inflowing data and new outcomes coming from Brexit talks. Finally, do notice that the latest surge was mainly driven by USD weakness (the same was acknowledged by the RBNZ yesterday), hence it seems that there is some space to retrace the rally assuming a short-lifted comeback of the greenback. Thus, the GBP could be heading higher in the longer-term against the US dollar (being steered more by the weak dollar though), but it could struggle to make more gains at the broad market.

 

The GBPUSD strives to break a short-term resistance at 1.3980 and if it fails to do so, it could commence an extended move to the downside (having assumed possible appreciation of the US dollar). If so, the pair could break through 1.3830 trying to reach a more important support placed at 1.3610.