GBP/USD

The BoE's nine rate-setters all voted to hold rates at 0.75%, as expected. Governor Mark Carney said the BoE did not expect a disruptive no-deal Brexit, but if it happened, the central bank would be in uncharted territory and it was not possible to predict if rates would need to rise or fall in response.

Brexit is dominating the outlook for the world's fifth-largest economy which has slowed since 2016's referendum. "Since the nature of EU withdrawal is not known at present, and its impact on the balance of demand, supply and the exchange rate cannot be determined in advance, the monetary policy response will not be automatic and could be in either direction," Carney told a news conference.

The BoE cut rates and ramped up its bond-buying programme after the shock referendum vote. Carney cautioned against assuming it would do the same in the event of a no-deal Brexit. Unlike 2016, inflation is above target and the BoE would be responding to actual economic damage, not a fall in confidence. Sterling would probably fall and push up inflation. Combined with a hit to supply chains and possible trade tariffs, that would argue for raising rates, Carney said.

On the other hand, policymakers would need to balance the hit to growth from lost trade, uncertainty and tighter financial conditions. That would normally make a case for lower rates.

The BoE pencilled into its forecasts the bets in financial markets that there will be almost three quarter-point rate rises over the next three years. That compared with just over one in the forecasts that accompanied August's rate rise.

Asked whether investors were pricing in enough rate hikes, Carney pointed to the BoE's forecast that inflation would still be above its target in two years' time, suggesting he thought investors were being a bit too cautious about the pace of hikes.

Sterling briefly edged up against the dollar after the BoE policy announcement and was on track for one its biggest daily gains this year due to optimism about Brexit talks and broader dollar weakness.

We saw impressive GBP/USD race for the daily cloud on Wednesday into Thursday and the bid is holding. We managed to take profit on our 1.2730 long play. Strength of the Wednesday’s bull harami confirmation signals trend reversal. We are looking to buy GBP/USD again.

Today, the Bank of England will simultaneously publish the November Inflation Report, the MPC policy decision, and the minutes of the MPC meeting ending 31 October. We expect the MPC to vote unanimously to maintain the bank rate at 0.75%, with a non-negligible probability that a minority dissent in favor of an immediate hike.

Three months ago at the August meeting, the MPC voted unanimously to hike the bank rate by 25bp and said that further “gradual and limited” rate hikes were likely to be necessary over the forecast period in order to return inflation sustainably to the 2% target. However, BoE Governor Mark Carney sounded notably more cautious in the August Inflation Report press conference, saying that there was uncertainty over how households and firms would react to Brexit negotiations in the coming months, and that the MPC needed to “walk, not run” in raising rates.

Recent data have been better than expected and, in the absence of Brexit-related uncertainty, might have led the MPC to hike again. Monthly GDP growth (3-month/3-month) rose to 0.7% in the three months to August. This will ease in the third quarter of 2018 as the positive base effect from the weather-hit weak March data falls out of the comparison, but the risks to the BoE’s projection for 0.4% qoq growth in the third quarter of 2018 are skewed to the upside. A key question for the MPC is how much of the recent strength is temporary (related to strong retail sales boosted by warm weather and the World Cup, as well as payback from the weak first quarter of 2018). The most striking data release of the last month was that regular pay growth rose 0.2pp to 3.1% yoy in the three months to August, its highest level since January 2009, but it is too early to conclude that pay growth has sustainably moved higher. Headline CPI inflation fell back to 2.4% yoy in September, reversing its rise to 2.7% in the previous month, but now is in line with the BoE’s August projection.

However, this better data news will likely take a back seat to Brexit negotiations, which remain at an impasse over the Irish border issue.

Britain on Wednesday said there was no set date for Brexit talks to finish, backtracking from a letter by Brexit minister Dominic Raab that suggested a deal on the terms of its departure from the European Union could be finalised by November 21.

Raab had said that a Brexit deal was firmly in sight and should be agreed by that date in a week-old letter to a lawmaker that was published on Wednesday, briefly sending sterling sharply higher.

But his department later said that while November 21 was the date suggested by the chair of parliament's Brexit committee, that did not mean a firm date had been set for a deal to be done.

Only a few MPC members have commented on the monetary policy outlook recently. Jon Cunliffe (a dove) said “there remains considerable uncertainty about the supply side. Domestic inflation pressures, while strengthening a little are not yet established at levels consistent with inflation at target”. In contrast, Andy Haldane (a hawk) said, “domestic cost growth in the UK is already running at, if not slightly above, rates consistent with the inflation target”.

Financial markets are only pricing in a 1.5% probability of a hike today, and a 35% probability of a hike by May next year. That is probably a bit low, given the recent better data and the MPC’s guidance that they want to normalize monetary policy. In our opinion this probability may rise soon, which should boost the GBP.

A Brexit deal is now firmly in sight and a deal should be in finalised by November 21, Brexit Secretary Dominic Raab said in a letter to a lawmaker.

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