The big bulk of BOE related events hit the pound hard. But as this was a big bulk of data, markets continue digesting it and the reaction is far from over.
Here are views from two banks on what awaits the pound.
Here is their view, courtesy of eFXnews:
First, ANZ:
The BoE’s Super-Thursday was dovish and a rate rise is unlikely in 2015 as soft commodity prices and GBP strength weigh on inflation, notes Australia and New Zealand Banking Group (ANZ).
“It is possible that some profit-taking on long sterling positions may become evident over coming days and the guidance that higher inflation and interest rates will take longer to materialise should also help to slow sterling’s rise,” ANZ argues.
“However, on a cyclical basis, the UK is well placed versus many of its competitors and near term corrections in the commodity crosses – GBP/AUD, GBP/NZD and GBP/CAD – should be limited. In our opinion, cable holds the biggest downside risk near term,” ANZ projects.
And here is the reaction from Danske:
Market reaction: The market was clearly positioned for a more hawkish BoE today and GBP swap rates are 3-4bp lower across the curve. For now, we stick to our view that BoE will hike in Q4 15 (most likely in November) but as mentioned above it depends on the development of inflation. Hence, we still project a significant rise in UK interest rates in the coming months and we expect the GBP yield curve to flatten, with rates rising most in the 0-5Y segments. Specifically, we target the 2Y GBP swap rate at 1.3% in 3M and 1.6% in 6M.
In the FX market, GBP weakened 0.7% versus EUR and 0.85% versus USD. According to our short term financial models, pricing action in the FX market seems fair given the decline in UK yields. However, EUR/GBP still trades 1.3 standard deviation above our model’s short term estimate of 0.69.Fundamentally, we still expect EUR/GBP to trade lower in the coming months driven by relative interest rates. We target the EUR/GBP at 0.69 in 3M to 6M but stress that the risks remain that the cross temporarily undershoots our targets. While speculative investors gradually have bought GBP since the beginning of the year, non-commercial positioning is fairly neutral, according to the latest IMM positioning data. Hence, there should room for further GBP longs to be added.
Relative rates are also expected to be an important driver for GBP/USD in H2. Based on our interest rate forecasts, where we expect the Fed to hike in September, the repricing of 2Y US interest rates is expected to much larger relative to the 2Y segment in UK. In fact we expect the rate spread to change sign in the coming months going from 20bp today to -10bp in 6M. Even if the Fed hikes later this year, the 2Y swap spread should still narrow substantially. We target GBP/USD at 1.51 in 6M.
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