Look to fade GBP rally on dovish Inflation report; Jobs data on Aug 14 key
We remain negative on GBP after the Bank of England having moved to state-dependent forward guidance. The BoE said it stands ready to undertake further asset purchases while the unemployment rate remains above 7% (the threshold), but noting the policy would “knockout” if any of three conditions cease to hold, being (a) inflation expectations becoming unanchored, (b) inflation overshoots the 2% objective by 0.5% over 18-24 months and (c) the Financial Policy Committee (FPC) judges that the stance of monetary policy poses a significant threat to financial stability that cannot be contained by the existing tool kit of measures (e.g. macro prudential policy). GBP has however rallied and short-sterling futures have sold off on a less dovish interpretation of the Inflation report. We think this may be linked to the large upward revision to GDP (2.7% in 2014 from 1.9% prior). However, we point out that given that the MPC is forecasting the unemployment rate to remain above 7% until at least Q3 2016 (3 years out), it implies the CB considers that even such an increase in growth will not be enough to reduce slack in the economy. Moreover, the GDP forecast is predicated on bank rates remaining unchanged, something that money market rate futures are not pricing in (forward rates still higher). Hence, we would look to fade this rally. Event-wise, the unemployment data (ILO release due August 14) will take on added significance. It has been around 7.8-8.0% consistently for well over a year. We maintain our 0.8850 EURGBP digital call (Aug 23 maturity) entered at 17%.
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BNP Paribas