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GBP: Trading ‘Super Thursday’ – Views From 10 Major Banks

In what many analysts have referred to as 'Super Thursday,' the BoE will overhaul its communications and release simultaneously the MPC decision, the minutes of that same meeting, and its August Inflation Report. The following are the expectations for the day as provided by the economists at 10 major banks along with some strategists to trade GBP into the event as provided by the FX strategists at these banks.

Goldman Sachs: There are a few key points to watch. a) First, while we expect policy to remain unchanged, we do expect that two – possibly three – MPC members will have voted for a rate rise. b) Second, we expect that the projected path for near-term inflation will be revised lower as part of the inflation ‘fan chart’, but that the risks around the central case will no longer be skewed to the downside, on account of the pick-up in wages. c) Finally, we expect the Bank’s two-year inflation projection to be close to the 2.0%, and the three-year projection to remain above the 2% target, encouraging a steeper path for forward rates. Taken together, we expect this outcome to be a modest positive for Sterling, as the Bank signals that on a medium-term horizon, the UK economy is building inflationary pressures that can outweigh the drag on inflation from a stronger currency. As we recently showed, while a revision of the inflation path lower in the near term will signal no urgent need to hike rates, a steeper curve is likely to be currency positive, particularly as market pricing has become more dovish in recent sessions. A key risk, however, is that the Bank pushes back on Sterling strength by signalling a larger negative impact over the next two years. We continue to see EUR/GBP falling further and forecast 0.65 in 12 months.

BNPP: We recommend long GBP exposure heading into this week’s Bank of England (BoE) meeting. This will be the first meeting at which the BOE releases minutes and its quarterly inflation report at the same time as the policy decision. We expect the event to be a broadly-hawkish affair, with a real possibility of more than two dissents in favour of a rate hike. With rates markets pricing in less than an 80% probability of a 25bp hike by February 2016, we think the market could be caught off guard and see scope for UK front-end yields to adjust higher, in turn supporting the GBP

Barclays: Markets will have to process a substantial amount of information on the day, and we expect GBP vols to edge higher, as the overhaul of the MPC’s communications is expected to coincide with one or more BoE members voting in favor of a hike – our baseline is for an 8-1 split vote, with Martin Weale the most likely candidate, although we think the risks could be skewed toward a further vote split (7-2). A split vote at this stage would lead the way for more intense discussions toward year-end, when price pressures are less soft. As the minutes of the July MPC referred to a “number of members” for whom the decision was finely balanced, we believe that David Miles – even though this will be his last meeting – or Kristin Forbes could also be tempted to vote for a hike. Because these two members have not yet voted for a hike in this cycle, the signaling effect of their vote might be greater than for Weale or McCafferty. Yet given the current state of the economy, we continue to think that an additional six months of data will be necessary to convince the majority of the committee to hike rates and continue to expect the first rate hike in Q1 2016. On the QIR, we see scope for the BoE to revise its 2015 productivity and wage forecasts higher, whereas it will almost surely have to revise its 2015 inflation forecast lower, given very soft price pressures. We think, however, that the inflation path is likely to be steeper, with 2016 inflation revised higher, in our view. Overall, despite a plethora of information received simultaneously, we believe GBP could benefit the most against European currencies, particularly the EUR, and see Friday’s uptick in EURGBP as favorable entry point to re-engage in short positions.

Deutsche Bank: We still like to be long pounds going into Thursday’s same-day release of the Bank of England policy decision, minutes and Inflation Report. Speculation is growing over a split vote on the policy decision. After the July minutes highlighted that ‘for a number of members…absent [Greece], the decision…was becoming more finely balanced,’ it is possible that more than the two previous hawks (Weale and McCafferty) dissent, with Forbes and Miles possible candidates. Dissenters or not, risks are asymmetric as market pricing is still too dovish. Less than a 20% probability of a hike is priced for year-end (versus over 80% for the Fed) and the first hike is not fully discounted until May next year. Yet growth in the UK has been stronger than over the Atlantic and the economy is actually generating wage pressures, unlike the US. Current central bank signaling doesn’t suggest the MPC will move first, but this has happened more often than not since inflation targeting was adopted in the early 1990s, and the Bank of England have publically dismissed the idea their decision will wait on other central banks. At the very least, hawkish Fed rhetoric should provide the Bank of England cover in not overplaying recent commodity price falls. The pound has tended to do well around Fed/Bank of England hiking cycles, irrespective of who goes first.

BofA Merrill: Given the vast amount of information that will become available at the same time, the initial GBP reaction therefore may not necessarily be the right one in the first few instances and in some regards “Super Thursday” could turn into the UK version of US non-farm payrolls day as one of the most significant trading days for the pound. As such, we would expect GBP volatility to be elevated each quarter when the Minutes and decision are accompanied by the release of the Quarterly Inflation Report. What will matter for FX markets from the variety of BoE releases is the voting pattern and the extent to which some members’ decisions were “finely balanced” from the Minutes and the medium-term inflation projections based on current and market-based rates from the Quarterly Inflation Report. We would isolate these themes as focal points for the currency. Given the recent rhetoric from the BoE, and David Miles in particular, there is likely to be some market expectation that he has voted for a rate hike to make it a 6-3 decision. Any disappointment on a 7-2 should, however, prove short-lived as Miles is due to leave at the end of the month thus diluting the impact of his decision in any case. More important will be the first public utterances of the newly appointed MPC member Gertjan Vlieghe who will take up his position on 1 September. However, with the decision to hike rates coming into “sharper relief” at the turn of the year, we remain GBP bulls and expect the pound to rally into the start of a rate hike cycle as it has historically done.

SocGen: The Bank of England is set to keep its key rate unchanged at 0.5%. However, recent MPC Member speeches have shown a gradual shift towards a more hawkish stance. One or two members may even decide to vote in favour of a rate increase this month. Moreover, in a recent speech, Mark Carney signalled that the first rate increase will come at around the turn of the year. As a result, while a rate hike before the end of the year cannot be ruled out, we believe the majority of the MPC will continue to err on the side of caution until early next year. Overall, a first rate hike before the end of the year cannot be ruled out. However, given in particular the still elevated external risks, we continue to believe the BoE will wait until early next year before pulling the trigger.

Credit Agricole: The BoE August inflation report, policy meeting and minutes will all be released on Thursday at 1pm BST. The inflation report and the minutes in particular will attract considerable attention. Investors will look for evidence that there were dissenters at the MPC who voted for a hike already in August. In addition, markets will pay closer attention to the latest set of growth and inflation forecasts looking for indications that the BoE is now expecting inflation to rebound more quickly towards its 2% target. Indications that there was a split vote at the MPC in August and that the BoE is now more constructive on the UK’s inflation outlook should encourage further frontloading of rate-hike expectations and support GBP. The scope for GBP outperformance may be less pronounced, however, given the different response we got so far in the FX and the rates markets to the apparent hawkish shift at the BoE of late. Indeed, while GBP regained more ground against most of the G10 currencies, the reaction in the rates markets was quite subdued by comparison. As a result, GBP/USD is now trading somewhat higher than the level that seems consistent with the current 2y GBP-USD rate spread. This discrepancy also highlights the downside risks for GBP if the market expectations of a pronounced hawkish shift at the MPC are disappointed next week. We stick with our bearish medium-term view on GBP/USD for now.

Credit Suisse: Three things are likely to be crucial for the market reaction: (i) the voting pattern; (ii) the inflation forecast; and (iii) the tone at the press conference. Our economists are particularly bullish on (i). If they are right, GBP should rally. Our own FX view is more cautious than that as we believe Fed’s reluctance to upgrade language will also keep the BoE from introducing hawkish signals. The global background of China growth concerns and material oil price falls, which will weigh on inflation, is another influence. Our FX base case is for a fairly neutral outcome from the event. We wouldn’t exclude disappointment against some of the more hawkish recent speeches, although it is not clear how much GBP might suffer on that. Unless the BoE completely flips again or perhaps reintroduces rhetoric against GBP strength, we think a GBP sell-off on a disappointment could be contained. This is because GBP would still remain one of the few stronger stories in G10 compared to other currencies that suffer from negative rates or commodity pressure. The lack of viable longs is to GBP’s advantag.

Danske: The case for an interest rate rise is building and we expect the MPC members to be divided at the August meeting on whether or not to increase interest rates (most likely a 7-2 split vote). We stick to our view that the Bank of England (BoE) will hike in Q4 15, most likely in November. In the FX market, GBP should rally on a divided MPC vote. We expect EUR/GBP to fall to 0.6950 for a possible test of the strong technical support level of 0.6936.

SEB: The BOE will leave policy unchanged this week but as a part of new arrangements, a concise summary covering the MPC’s policy decision and the main elements of the Minutes will now be produced and published along the decision. The summary will be published alongside every policy decision made by the MPC henceforth. However, this meeting is “less important” as there will be a new BOE Inflation Report presented this week. The MPC was unanimous at the last meeting as inflation and cost pressure remain subdued. There is however an increasing risk that some MPC members will dissent and vote for a hike. We expect the BOE to maintain current policy for the reminder of this year and look for the first hike in Feb 2016.

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