EUR/GBP: November BoE rate hike priced in - Danske Bank

Analysts from Danske Bank expect the Bank of England to make an interest rate hike in November and warned that is already priced in. They see little effect on the GBP while in the long-term clarifications regarding Brexit could see the GBP strengthening. They target EUR/GBP at 0.88 in 1M, 0.88 in 3M, 0.87 in 6M and 0.86 in 12M.

Key Quotes: 

“September PMIs suggest that the momentum in activity has been maintained and the NIESR GDP estimate points to slightly higher GDP growth of 0.4% q/q in Q3, compared with 0.3% q/q in Q2. However, the near-term growth outlook remains subdued, as negative real wage growth weighs on private consumption and Brexit uncertainty weighs on investments. UK inflation is increased to 3.0% y/y in September from 2.9% y/y in August.”

“We expect the BoE to hike the Bank Rate by 25bp in November, which is priced in with an 85% probability in the UK money market. In our view, this is merely the BoE taking back the ‘emergency cut’ it delivered in August 2016 (following the Brexit vote) and not necessarily the beginning of a new hiking cycle. Thus, we expect the BoE to remain on hold in the 12 months following the November hike.”

“While GBP could see some support going into the 2 November BoE meeting, we see little prospect of EUR/GBP breaking below 0.87 on the announcement due to the combination of already-stretched BoE pricing and long speculative GBP positioning. Longer term, we still see potential for a further decline in EUR/GBP driven by possible clarification on Brexit negotiations and valuations. However, with the ECB moving towards an exit as well and as relative growth is set to remain EUR/GBP positive, we see only modest downside potential in the year ahead.”