DB FX Daily: GBP Faces Another Uncertain MPC Meeting

[RTFX-Trading]

FX Daily: GBP Faces Another Uncertain MPC Meeting

GBP Faces Another Uncertain MPC Meeting

The market and the consensus of economists are split on the outcome of today's MPC decision - a situation we have seen in the run-up to several MPC meetings over recent months, and one which has generally prompted a move in GBP. Our economist looks for a 25 bp rate hike today but also sees a close decision which could even produce a three way split in the committee (votes for rate hike, hold and cut).

If the MPC were to raise rates by 25 bps today, the rate move in August 06 (see chart below at left) could be of some guidance as the market and economists had priced some probability of a move but the timing was earlier than many expected. The August 06 decision saw a modest 1% appreciation of GBP against EUR equivalent to 0.6700 given current levels and above 1.99 in GBP/USD should the USD hold steady this morning. But an added dimension if the MPC were to raise rates today could be an emerging belief in the market that a move to 5.50% could perhaps be the last tightening in the cycle. If such a view were to be backed with a slowing in UK data and a softening of MPC rhetoric over the coming weeks, then the rate boost to GBP from an early rate hike could be short-lived and the focus begin to shift towards a peak in UK rate spreads especially vs. EUR.

Unchanged rates from the MPC today would likely see GBP correct but the market is likely to still see a strong probability of a rate hike over the coming months with May the most likely timing given the publication of the Inflation report. In addition the current recovery in risk appetite which has boosted FX carry trades is also likely to limit the potential damage to GBP much as was seen in AUD over the past 48 hours.

EUR/SEK Coming Back in Line with Rates

EUR/SEK failed to test 9.40 earlier this week and the 1% retracement since then has brought EUR/SEK back in line with 2Y swap differentials as seen in the chart at right below. While the recent move higher in EUR/SEK may have been a slight overshoot relative to rates, the fundamental picture has not changed greatly either in terms of rates or capital flows such as FDI. We see a 9.20-9.40 range in EUR/SEK for the time being.