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Does this week’s data impact the GBP and FTSE 100 outlook?

This week has provided markets with a crucial insight into the UK economy with the release of inflation, jobs and retail sales figures. Those numbers are so important because they have an array of signals and consequences. Let’s take a look at how the UK economy is faring and what these data points mean for the Bank of England (BoE) and local markets going forward.

Employment

The UK jobs picture soured somewhat in September, with a rise in claimants coupled with an upward revision to the August number. The figure of 18,500 claimants is the second highest monthly figure since mid-2017. Meanwhile, the August average earnings figure rose to 2.7%, which is not far off the highest level seen over the past three years (2.8%). Put this together and you have a warning sign against the BoE raising rates (rising unemployment claims), alongside a signal that allows the BoE to worry less about the problem of falling real wages seen throughout 2018. The issue of rising inflation is certainly a problem for the BoE, but as long as wages rise by a greater amount, that worry is mitigated to an extent.

Inflation

With wages on the rise, a sharp decline in inflation has provided yet another signal that the BoE can rest easy for the time being, with consumer price index (CPI) declining from 2.7% to 2.4%; the joint lowest level since first quarter (Q1) 2017. Crucially, we also saw a sharp reduction in the core CPI reading, which strips out volatile elements such as food, energy, alcohol and tobacco items. The energy aspect is particularly important as this is an element which the central bank cannot do much about through the use of monetary policy. Thus, if the cost of petrol rises, the BoE would be foolhardy to think that they could mitigate that shift by raising rates. The fact that inflation has been declining with those more volatile aspects stripped out means that the BoE will take greater attention to the shift.

This reduction in inflation coupled with the rise in wages means that real wages are on the rise, taking some of the pressure off the BoE and lesseneing the chances of another rate rise in the near future.

Retail sales

The retail sales figure is often overlooked in terms of its impact on the economy, with the term retail typically associated with the small players in trading rather than institutional whales. However, in the economic sense, consumption is a huge determinant of growth, with household expenditure accounting for 60% of UK gross domestic product (GDP). Retail sales do not account for the total household consumption amount, yet it certainly has a significant impact on the total figure. The volatile monthly figure is less of an interest for us, yet with the yearly number declining to 3%, we are seeing continued stability following the recent recovery. That measure was below 2% for eight months between Q3 2017 and Q2 2018, so anyone worried about the declining monthly figure (-0.8%) today should look at the monthly trend to note that things are actually looking relatively rosy.

Taken in the context of the BoE, the recent recovery in retail sales will bolster the idea that growth could begin to pick up thanks to improving consumption. The rise in retail sales could point towards a strong Q3 GDP number, which could counteract any fears.

Brexit

It is important to note that while the BoE has previously showed intent to normalise rates to some extent, given the threat posed by inflation, the impact of Brexit will always remain a key determinant of whether the Monetary Policy Committee (MPC) can act. Easing real wages reduces the need to raise rates, while improving GDP prospects through the recovery in retail sales will prove that the economy could possibly handle another rate rise. However, the risk of a no-deal Brexit will loom large at the moment, making any action unlikely for the time being. A deal between the UK and EU would likely remove that barrier, and such a deal would make the pound more responsive to shifts in economic data. The decline in the pound this week has been partly due to the diminishing hopes of a deal at this week’s EU summit, but also a reaction to the falling economic data (rising claimant count and retail sales) and an easing on pressure for the BoE to act (rising wages, falling inflation).

Of course, it is obvious to keep an eye out for a Brexit deal as a key driver of price action in the pound, but be aware that a deal could open up the markets to recent economic trends. The BoE does want to raise rates again, but that will only happen if the economy is strong enough and the chance of a no-deal Brexit is negated. With retail sales pointing towards a strong Q3 growth reading, we could see a hawkish BoE soon after an agreement is found (if indeed it is). Such an event would point towards a likely rate rise soon after.

The daily chart below highlights the holding pattern we find ourselves within over the past month, with markets showing some signs of wanting to get into a relief rally in the event that a deal is reached, yet not confident enough to really follow through. Expect an initial boost to the pound if a deal is reached in the coming months, but bear in mind that such a shift could be accentuated when people realise that this would have a significant knock-on effect on the BoE’s monetary policy approach.

Interestingly, traders should remain aware of the potential counter-intuitive nature of the FTSE in all of this. The FTSE 100 has an inverse relationship to the pound, driven by the highly internationalised nature of the index. A higher pound will reduce the value of foreign earnings when they are reported back in sterling. Therefore, while many would expect to see a rise for the FTSE 100 and pound in the event of a breakthrough, there is a strong likeliness that we could see the index fall. Thus, expect to see the pound reflect improvements to the UK economy or a Brexit breakthrough, while the FTSE 100 will likely to do the opposite, as was the case on referendum day.

The weekly chart below sees breakdown from the rising wedge formation, with the price falling back towards the crucial 6841 swing low. This points towards a possible break to the downside in the event that an agreement is found in Brexit negotiations. While the trendline break is worrying for FTSE bulls, we would need to see a break below that 6841 level to signal the beginning of another leg lower for the index from here on in.

Source: IG
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Sterling falls after May bows to Brexit pressure in parliament

The pound fell on Monday as a debate in Britain’s parliament exposed the level of dissatisfaction within British Prime Minister Theresa May’s governing Conservative Party over her plans for Brexit.

The pound fell to an intraday low of $1.3223 on news that May had bowed to pressure from Brexit supporters and accepted their changes to a customs bill that underpins Britain’s exit from the EU.

“The move in sterling is pretty contained at this point but this [accepting of amendments] is being viewed by the market as a step towards a leadership contest,” said Jordan Rochester, currencies strategist at Nomura.

Eurosceptics say May’s plan leaves Britain too close to the European Union and are trying to force her to change course, while pro-EU Conservative lawmakers say it leaves the country too distant from its biggest trading partner.

Sterling has struggled to capitalise in recent weeks on signs that the economy is improving because of mounting uncertainty over whether Britain can secure a trade deal with the EU before it leaves the bloc next March.

Markets expect the Bank of England to hike interest rates in August but the British currency has fallen 9 percent since April partly because of the wrangling within May’s party.

May is expected to survive Monday’s debate on a customs law but the debate risks undermining the government and increasing the chances of an early election which would hurt the pound.

“Political uncertainty helps to explain why the pound has not strengthened yet on the back of the government’s plans for a softer Brexit,” said analysts at MUFG.

At 1545 GMT the pound was down 0.1 percent versus the dollar at $1.3224 and down 0.3 percent against the euro at 88.52 pence..

Sterling finished last week down one percent against the dollar, its biggest weekly drop since late May.

President Donald Trump’s visit to the UK last week added to uncertainty about the Brexit talks and Britain’s trade relationship with the United States after the divorce. Trump criticised May’s handling of the Brexit talks.

May attempted to face down would-be eurosceptic rebels by warning on Sunday that if they sink her premiership then they risk squandering the victory of an EU exit that they have dreamed about for decades.

Meanwhile over the weekend, German business groups told members to prepare for a hard Brexit.

Long bets on sterling have been whittled down in recent days with overall net positions mildly bearish on the currency, positioning data shows.

Source: UK Reuters

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British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade

Pound Sterling on front foot in final week of 2017. Economic and political news flow is thin but there’s scope for low volumes to exaggerate moves in FX.

Sterling overcame resistance from a weak US Dollar Wednesday, although a more robust performance against the greenback by the Euro helped push the Pound-to-Euro rate down by a fraction – reversing an earlier gain for the pair.

Price action comes amid a light flow of economic data and low volumes in foreign exchange markets as London, the main centre for currency trading, operates with a skeleton crew throughout much of the current week.

“The UK has returned from the long holiday weekend, though with another one coming up and the Pound in the middle of a bigger range, there doesn’t appear to be much incentive for the market to be wanting to make any big pushes,” says Joel Kruger, an FX strategist at LMAX Exchange.

The Pound was quoted 0.16% higher at 1.3394 against the US Dollar by the London close while the Pound-to-Euro rate was marked 0.20% lower at 1.1255. The Euro-to-Dollar rate was quoted 0.35% higher at 1.1899.

“The market has been consolidating but ultimately looks poised for a continuation of the 2017 uptrend, with a higher low waiting to be confirmed at 1.3027 on a break of the 2017 high at 1.3658, Kruger adds, referring to the Pound-to-Dollar rate.

“This will then open the door for a measured move upside extension back above 1.4000 and towards 1.4200 into 2018,” Kruger adds, referring to the Pound-to-Dollar rate.”

British Pound Advances On Dollar, Slips Against the Euro in Thin Holiday Trade Commercial Finance Network

Above: Pound-to-Euro rate shown at hourly intervals.

2018 Agenda: UK Economy and Brexit

The ebb and flow of economic growth and the stop-start march of Brexit negotiations have been front and centre for the Pound in much of 2017.

Similar will be true for the currency in 2018, with traders looking to see talks on future trade and transition opened once into the New Year, while hoping for another interest rate rise from the Bank of England.

“For the next week and possibly two, we do not expect new Brexit developments as the U.K. Parliament isn’t expected to debate on the issue until mid January,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management.

“There are no major U.K. economic reports scheduled for release until next week at which point the pace of growth and more specifically the PMI reports will be in focus.”

Next week sees January and the New Year get underway with the monthly surveys of purchasing managers across the manufacturing, construction and services industries, which will be among the final inputs to expectations for economic growth in the final quarter and 2017 as a whole.

Talks around a possible “transition deal” will begin in January, with markets hoping to see a quick agreement struck in the first quarter, before discussions move onto future trade ties after the next European Council meeting.

Simultaneously, markets will be positioning for the next round of Bank of England growth and inflation forecasts, due for release in February. These will be key for the market’s evolving expectation of future interest rate decisions.

The Sterling Overnight Index Average (SONIA) rate most recently implied an expectation by the market that the Bank of England will wait until February 2019 before raising UK interest rates again.

However, the UK economy is recovering its lost momentum, wage growth is picking up and inflation of 3.1% is still more than 100 basis points above its target, which could mean there may be scope for the BoE to signal an earlier move is possible once into the New Year.

This would be positive for the Pound, particularly when considering that markets are already braced for three Federal Reserve hikes in 2018 and that the European Central Bank is yet to announce a full exit from its quantitative easing program.

Source: Pound Sterling Live

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Pound Sterling Set for a Steep Fall Vs Euro in 2018 Say Lloyds Banking Group

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year.

The Pound-to-Euro rate could be set for a steep fall in 2018, according to strategists at Lloyds Banking Group, who warn of considerable uncertainty that will surround the exchange rate in the year ahead.

Brexit and monetary policy on both sides of the English Channel will be key drivers of the Pound and Euro next year, with acrimony in Brexit negotiations and slow economic growth in the UK being enough to keep the Bank of England on hold. European Central Bankpolicy will be important too.

“Comments from Brexit Secretary David Davis and EU Chief Negotiator Michel Barnier have reinforced the challenges both sides face in coming to a comprehensive agreement,” says Gajan Mahadevan, a quantitative strategist at Lloyds Banking Group.

Fears over the path of Brexit negotiations eased in December when the European Council voted to allow EU negotiators to begin talking about trade and transition. This was after an agreement was struck covering a “divorce bill”, the safeguarding of citizens rights after the UK leaves and the Northern Irish border.

“Davis has suggested that the UK is aiming for a ‘Canada plus plus’ deal, adding that the intention through negotiations is to treat goods and services as ‘inseparable’. However, Barnier has already outlined that there will be no ‘special’ treatment for the UK financial services sector,” Mahadevan adds.

New guidelines for EU negotiators in the second phase of talks have also highlighted scope for more deadlock between the two sides during the months ahead.

Brussels wants the withdrawal commitments to be made legally binding before the UK’s exit in 2019, but to leave the bulk of trade discussions until after March 2019.

Prime Minister Theresa May and David Davis have insisted that “nothing is agreed until everything is agreed” and that the withdrawal commitments cannot be firmed up without a wider agreement.

“Some activity indicators suggest Q4 GDP growth may be slightly softer than Q3, and the health of the UK consumer is being carefully watched. With interest rate markets are not fully ‘pricing in’ a hike until Q1 2019, uncertainty shrouds the Bank rate outlook,” Mahadevan adds

The Bank of England raised interest rates by 25 basis points, to 0.50%, in November but markets are divided over how soon another hike can be expected. Interest rate markets currently suggest it will be 2019 before the BoE moves again.

Any change in this stance will either pressure or boost Sterling as bond yields and interest rate derivatives prices rise or fall in response to new developments.

“We anticipate the next hike in UK Bank rate to be in August 2018. In contrast, we see the European Central Bank (ECB) leaving interest rates unchanged next year, although it is likely to wind down its asset purchase programme,” says Mahadevan.

The European Central Bank is widely expected to wind down its quantitative easing program in 2018, which currently sees it buy €60 billion of European bonds each month in an effort to keep interest rates low and spur economic activity.

This could place upward pressure on the Euro again in 2018 although there are risks to the outlook for the common currency too, notably around the Italian election that is set to take place in the first quarter.

“Balancing all factors, we see GBP/EUR limited to a range, forecasting 1.09 for both end-2018 and end-2019,” says Mahadevan.

The fall to 1.09 in the Pound-to-Euro rate that is pencilled in by Mahadevan’s forecast implies losses of some 3.5% next year, which is broadly similar to the loss seen by the exchange rate in 2017.

“However, given the high degree of uncertainty around key drivers, there are significant risks to our profile in both directions. Unsurprisingly, this is evident in market sentiment – analysts’ forecasts for GBP/EUR range from 1.04 to 1.25, a range of just over 20%,” Mahadevan warns.

The Pound was quoted 0.04% lower at 1.1251 against the Euro during early trading Thursday.

Source: Pound Sterling Live

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No change in interest rates

This week the Bank of England voted to keep interest rates the same. The currency market tends to focus on how many members of the committee vote one way or the other and this week it was 9-0.

At the time of writing (Friday) the pound is down against the euro at 1.1330 and against the US dollar at 1.337 while the euro is at 1.18 against the US dollar. In the run-up to Christmas the markets aren’t expecting any dramatic data so it is likely to be political events affecting exchange rates.

Whatever the market rate, what is the rate you get? You certainly won’t get the rate you see online or on your iPhone. For a start there is a buy and a sell rate in the market so if you see just one rate, that will be in the middle of the buy and sell. How close you get to the market rate depends on the amount you are buying – so for a few hundred euros at the airport you could be as much as 10% away from the market, while a hundred thousand euros would be nearer to 2% at your bank or less than 1% at a broker.

The phrase ‘no commission’ is nonsense as the actual commission is hidden in the exchange rate. How much depends on your bank and the expensive rent a Bureau de Change has to pay at the airport. Using a broker often saves you money on large transactions.

Source: The Leader

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British Pound Vs Euro Has Strategists Divided As The Bank of England Looms

November’s interest rate decision is fast approaching and, with recent data having shown the UK economy at risk of a slowdown, strategists are increasingly divided over what to expect from the Bank of England.

Those hoping for a retreat from earlier warnings over UK interest rates may be left disappointed in the wake of the Bank of England’s November monetary policy announcement.

A solid majority expect the Bank of England to hike rates in November while less than half of strategists expect it to follow through with further policy action in the months after.

“There is an argument doing the rounds that the UK is raising rates so that they can cut them when the ‘inevitable’ Brexit-related collapse happens. Maybe,” says Ben Powell CFA, a multi-asset class content salesperson at Swiss bank UBS.

The bulk of those who do not subscribe to the Brexit collapse view have often cited growing concerns over FX-induced inflation as the motivator behind what is, according to them, likely to be limited policy action.

“At 4.5% UK unemployment is at lows not seen in 5 decades. UK asset prices are booming. In 2016 UK household wealth rose by ~GBP900bn to beyond GBP10Tr for the first time. That ~GBP900bn growth is around 50% of GDP,” says Powell.

But UK economic fundamentals have remained on a sound footing since the Brexit vote in June 2016, despite the prevailing narrative in much of the media and most parts of the financial world.

“UK borrowing has never been cheaper. Outstanding resi mortgages cost 6% 10 years ago and 2.7% now; new lending is at 2.3%. Nearly half of today’s unsecured personal loans cost less than 5%; Sainsbury’s and Tesco’s banking arms are advertising unsecured loans at ~3%, some for up to 10 years in duration,” wrote Jason Napier, an equity research (banks) analyst at UBS.

With the market’s eyes fixed keenly on a deterioration in UK consumer spending that has weighed on economic growth over recent quarters, the “emperor’s well clothed state” has gone unacknowledged by the majority.

“Clearly it’s a matter of judgement, but it may be the case that the Governor thinks supermarkets offering 10 year unsecured loans for ~3% feels a bit punchy. There is also a boom in car financing,” says Powell.

Bank of England governor Mark Carney said in a September speech that UK banks have been extending too much credit to consumers at insufficient rates of interest and that the more “frothy” parts of the market should be addressed.

“This is what the data suggests. And it is what the Governor is telling us he is doing. My sense is that those hoping for a ‘dovish hike’ next week are going to be disappointed,” says Powell.

Pound to Be Left High and Dry Says JPMorgan

The Pound Sterling is at risk of being left high and dry against the Euro and other G10 counterparts over the coming weeks as the interest rate tide that buoyed it through September recedes further.

Bank of England policymakers may not be able to do enough to keep it afloat even if they do vote to hike rates at the November meeting, according to strategists at JPMorgan, who are still betting against the Pound-to-Euro rate.

“Our highest conviction macro trade in recent weeks has been short GBP as we felt that UK rate hikes were overpriced given the weak starting point for UK growth and the existential Brexit shock that continues to dominate the medium-term outlook,” says Daniel Hui, a foreign exchange strategist at JPMorgan.

The foreign exchange team at the US bank say the UK economic backdrop made it difficult enough as it was, in September, to justify embarking on an interest rate hiking cycle but observe that the economy has shown signs of slowing further since then.

“BoE expectations have come under pressure this from a combination of lacklustre growth data releases (annual growth in retails sales is now close to 1% compared to +4% when the BoE eased policy last year) together with a stream of commentary from MPC members that reveals a greater range of opinion about the timing of any monetary tightening,” says Hui, in a note written Friday.

The Pound was buoyed in September when the Bank of England said it begin withdrawing stimulus (hiking rates) over the coming months if inflation strayed further north of its 2% target and the economy remained on a steady footing.

By the end of that month the British currency had posted the strongest performance of all those in the G10 basket as traders rushed to price in a Bank of England hike in November and further action to come in 2018.

“The rate market has belatedly begun to rethink its scenario of a relatively normal rate hike as a result of more equivocal commentary from the BoE and the absence of lift in the growth numbers,” says Hui. “Next week’s 3Q GDP print is expected to confirm the UK as the clear growth laggard within G10, and so maintain the sense of drift in rate expectations and GBP.”

The BoE is expected to raise the bank rate by 25 basis points on November 02 but the number of voices questioning whether this is the right thing to do has grown in recent weeks.

“But it’s important to recognize that a less assertive BoE outlook is not the only factor weighing on GBP, as we interpret GBP’s recent moves as reflecting not only a partial retrenchment of priced hikes, but also the additional leverage of GBP to lack of progress in the Brexit talks and the increased risk of an accidental no deal,” writes Hui.

Hui notes the recent signs of progress in Brexit negotiations but flags that trade and transition talks are unlikely to begin until December at the earliest, the atmosphere around talks may remain uncomfortable for the foreseeable future and risks around sentiment to the Pound will remain high.

The Pound received a boost over the course of Friday and Monday after October’s European Council summit concluded with Brussels sounding a more conciliatory tone on the subject of Brexit negotiations, which revived hopes that “sufficient progress” could soon be made for negotiations to move onto the subjects of trade and transition.

“Our largest net position is long EUR against USD, GBP and CHF. The ECB taper announcement is expected to be marginally constructive for EUR,” says Hui. “But we don’t expect fireworks as the ECB will emphasise dovish forward rate guidance to anchor Bund yields despite what could be a sharp slowdown in the run-rate of asset purchases. EUR upside will be a grind.”

The Pound-to-Euro rate was quoted 0.04% higher against the Euro at 1.1237 during early trading in London Tuesday while Sterling was marked 0.08% higher at 1.3215 against the Dollar.

Source: Pound Sterling Live

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Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note

Friday’s boost to the Pound comes closely on the heels of a sluice of bad news for the UK economy, which has recently seen consumer spending fall and the outlook for consumer credit deteriorate further.

The Pound rose strongly throughout the morning session Friday as October’s European Council summit looked set to conclude on a positive note.

Comments from German Chancellor Angela Merkel, Prime Minister Theresa May and a host of other officials were behind the lift, all of which seemed to suggest Brexit negotiations may soon move forward onto the subjects of trade and transition.

“My impression is that these talks are moving forward step by step,” Merkel told reporters. “From my side there are no indications at all that we won’t succeed.”

Markets have feared a possible delay to the progression of talks on to the subject of trade beyond December.

PM May reiterated her Florence promise that the EU will not suffer a budgetary black hole during the current spending period, as a result of Brexit, which runs into 2020.

“There is still some ways to go on Brexit,” says Theresa May. “I am ambitious and positive about the Brexit negotiations.” She also reiterated that the UK will “honour our commitments.”

Any delay of trade or transition talks beyond December is seen as raising the risk of a so called “hard Brexit”, or a “no deal Brexit”, given the time it is likely to take to agree details of a “transition deal” as well as the future relationship.

The PM’s statements on Brexit came closely on the heels of public sector net borrowing data that showed UK government borrowing rising to £5.3 billion in September, up from £5.1 billion the previous month.

Despite a rise in the headline measure, the latest borrowing figure was the lowest of any September month for a decade.

The Pound-to-Euro rate had risen 0.43% to 1.1145 a short time ahead of noon while the Pound-to-Dollar rate added 0.08% to 1.3159, making Sterling the best performer against the greenback out of the G10 basket.

Pound Sterling Strengthens Vs Euro and Dollar As EU Summit Wraps Up On a Positive Note Commercial Finance Network

Consumer and Credit Outlook Clouds Further

On Thursday, Office for National Statistics data showed retail sales falling sharply by -0.8% in September, much further than the -0.1% decline pencilled in by forecasters.

Despite this, economists still see consumer spending as having stabilised during the third quarter and are also predicting a steady performance from the economy during the period.

However, with inflation pressures already dampening spending, the outlook for consumers and credit supply to households appeared to darken further on Thursday.

“UK household debt levels are high and still growing,” says Annabel Schaafsma, head of Moody‘s EMEA consumer surveillance team. “As real income declines, UK consumers are vulnerable to an economic downturn and any increases in inflation or interest rates could cause problems for household finances, especially for those on lower incomes.”

Moody’s, the ratings agency, said the faltering outlook for the UK consumer will have an impact on credit providers who support their business using the securitisation market.

“Additionally, consumer credit has been growing in excess of the rate of household income. This suggests we will see a weakening future performance of some UK consumer securitisation deals,” says Schaafsma.

Securitisations are an important source of liquidity for banks of all sizes and also for some corporates. Even mobile phone contracts can be securitized and sold on to investors, unlocking capital and providing an instant return for originators.

However, investor demand for UK securitization deals looks set to weaken, particularly in the mortgage market.

“Moody’s expects higher delinquencies in newer, non-conforming RMBS, as opposed to older, more seasoned deals. The borrowers in newer deals are more likely to be paying higher interest rates and have a smaller safety net. Buy-to-let RMBS is very sensitive to a weaker economy and occupancy rates and rents are expected to decline,” the ratings agency says in a statement.

Bank of England Credit Survey Points To Tighter Supply 

Thursday’s Moody’s report came barely a week after Bank of England data showed default rates on credit cards and other types of unsecured loans rose during the third quarter.

Recent BoE changes to bank capital requirements for different types of consumer loans had been expected to slow the pace of lending to households during the months ahead.

But a rise in default rates over the third quarter looks as if it might accelerate the pace at which banks now cut back lending to consumers.

“Default rates on credit card lending were reported to have increased slightly in Q3, while those on other unsecured lending increased significantly,” the Bank of England says, in its latest quarterly Credit Conditions survey. “Lenders reported that the availability of unsecured credit to households decreased in Q3 and expected a significant decrease in Q4.”

Source: Pound Sterling Live

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The Bank of England Is Backed Into A Corner and the Pound Under Renewed Threat

“We expect a November hike because of what the BoE has said, not what the data have done,” – Bank of America Merrill Lynch.

The Bank of England has backed itself up against a wall with September’s interest rate warning, according to one economist, who says a November rate hike is necessary for the sake of the BoE’s credibility but the wrong move for the economy. 

Never before in the BoE’s history as an independent central bank has the case for action been so weak at the beginning of a hiking cycle, and markets so certain that policymakers will move.

“We expect a BoE rate hike on 2 Nov. because of what rate setters have said, not what the data have done,” says Robert Wood, chief UK economist at Bank of America Merrill Lynch.

The Monetary Policy Committee at the Bank of England said in September that it could withdraw stimulus from the market (hike rates) over the coming months if inflation continued to march north of its 2% target and the economy remained on an even keel.

“We only reluctantly changed our call from them staying on hold after several rate setters doubled down on their September guidance that a hike was coming,” says Wood.

Market prices of UK government bonds now imply more than an 80% chance of an interest rate hike in November while Wood says it would take a third-quarter GDP reading of 0.0% or worse to prevent the Bank of England from pulling the trigger.

Sterling has risen from the depths of its August lows in response to the evolution of market expectations around rates, posting a year to date gain over the US Dollar and halving its 2017 loss against a resurgent Euro to around 4.5%.

“Inflation has peaked we think and will drop below 2% next year,” says Wood. “We think the BoE inflation forecast is well off beam given fading pipeline inflation pressures.”

UK wage growth is currently trending at around 2% per year and, according to Wood, this is insufficient to deliver 2% underlying inflation on a sustainable basis.

In addition, retail sales growth is showing signs of stalling, with volumes the weakest in four years, while labour market gains have also slowed. But markets are still pricing a hike in November and more to come once into 2018.

“Tenreyro mentioned this in her testimony: if the BoE get it wrong they may need to cut more in the future than they would otherwise have done. It may be safer to wait and see. That would be our view too for what it’s worth,” says Wood.

In among the recent economic statistics, and the market implied predictions for interest rates in November and beyond, is a recipe for an accelerated economic slowdown that merely backs the Bank of England into another corner.

This corner will have the same above target inflation and slowing economy on the one side of it and plenty of damaged credibility on the other.

MPC Is Divided But Majority May Still Hike

Traders are nearly unanimous in their expectation of a November rate hike. But the Bank of England’s panel of interest rate setters, the Monetary Policy Committee, is not nearly as unified.

“Jon Cunliffe’s recent comments suggesting he would not support a November hike have put the cat among the pigeons. We assume no hike is perhaps a 25% probability event, but it’s hard to know,” says Wood. “Mark Carney and the MPC could have been leading us on a merry dance here.”

All of the indications are that a simple majority will vote for a rate hike in November, although there could be a number of dissenters, which isn’t a good thing for Sterling.

“Based on their testimony to MPs this week, David Ramsden and Silvana Tenreyro seemed to us more likely than not to call for no change in policy in November,” says Wood. “Jon Cunliffe’s recent comments on BBC Wales suggested he would not support a hike in November.”

This means three of the nine voters on the MPC may depart from the herd and vote against a rate hike. Andy Haldane and Ben Broadbent are both internal members of the MPC and so, according to Wood, are likely to vote with governor Mark Carney for a hike.

Michael Saunders and Ian McCafferty’s hawkish views, favouring higher rates, are well known and so it is probably safe to say these two are quite likely to vote for a hike. Gertjan Vlieghe, who has historically opposed a tightening of policy, dropped his opposition in September and suggested he might back a rate rise too.

“This leaves us expecting a 6-3 vote, though we are more than usually uncertain about that. It could be a 5-4,” says Wood. “The vote will matter for how we interpret the Inflation Report.”

November or December?

A narrow majority of the MPC may seem likely to support a hike in November but, with recent data taken into account, at least one strategist is suggesting the Bank of England will kick the can down the road.

“Inflation as measured by the consumer price report is on the rise but as some U.K. policymakers including Governor Carney pointed out this past month, CPI could have peaked in October,” says Kathy Lien, a managing director of foreign exchange strategy at BK Asset Management in New York City.

Lien notes the recent pickup in wage growth in the UK and forecasts that rising pay levels will eventually mean a recovery in consumer spending and a consequent pickup in underlying inflation pressures. But she also flags uncertainty over when this is likely to happen.

“Investors may be pricing in a rate hike in November but based on the big drop in retail sales last month, they may delay the move to December,” she warns.

Meanwhile, with no major economic reports due from the UK in the week ahead, and policymakers set to remain silent, the Pound’s fate will be determined by Brexit headlines, the direction of the US Dollar and the European Central Bank’s eagerly anticipated monetary policy announcement.

“On a technical basis, GBP/USD has found support at the 50-day Simple Moving Average, so if there’s a place for a reversal, it would be off those levels,” says Lien.

Source: Pound Sterling Live