BoE Inflation report: Form of BoE forward guidance to dictate GBP reaction today
GBP has failed to benefit from very strong IP data yesterday reflecting uncertainty ahead of Wednesday’s UK inflation report and Governor Carney press conference (10:30 BST). There is a broad expectation that the BoE move to forward guidance, but how they do so will dictate GBP’s reaction in the next 1-2 weeks. There are two possibilities: (a) a state-dependent guidance i.e. keeping rates low until jobless rate reaches 6.5% or 7% (a la Fed) or (b) time-dependent guidance e.g. bank rate to remain low for 2 years. Our central case is (a) which will hurt GBP further. The policy minutes document for the July 4 meeting showed that the BoE was concerned about the rise in short-term rates, and they made a specific mention of overnight index swap rates 3Y forward. Today’s FX daily chart plots this measure against the UK’s jobless rate. An explicit threshold on unemployment would be GBP bearish as it would anchor rates at lower levels. Case (b), however, would be less dovish and could see some squeeze higher in GBP as it would not really come across as “policy innovation” and would suggest Carney struggled to get his way with a more aggressive easing approach. We maintain our 0.8850 EURGBP digital call (Aug 23 maturity) entered at 17%.
Read the full report: FX Daily 1
BNP Paribas