BoE: Removing Brexit insurance? - Westpac

Sean Callow, Research Analyst at Westpac points out that the British pound has been lively this week, gyrating either side of 1.32 as headlines on Brexit negotiations flood newswires.

Key Quotes

“Expectations for Bank of England policy have also been skittish. Early in the week, BoE deputy governor Cunliffe said, “the economy has clearly slowed this year” and that while interest rates are on an upward track, the timing of the first hike is “an open question.”

“Since those comments, we saw the advance reading on UK Q3 GDP reported at 0.4% q/q, 1.5% y/y. The pound jumped about 1% and market pricing for the BoE to raise the bank rate to 0.5% on 2 November rose to 89%. The pound’s response seems rather sharp, given that the consensus forecast was barely different, at 0.3% q/q, 1.5% y/y.”

“But at least FX traders have a rate rise from a major central bank to focus on, with plenty of detail to accompany the likely move. Note that the MPC has stressed that, “any prospective increases in Bank Rate would be expected to be at a gradual pace and to a limited extent.” And in context, a 25bp hike next week would only reverse the Aug 2016 easing which was driven by gloom over the outlook for the UK economy. In defence of Deputy Governor Cunliffe, we note that annual growth has indeed slowed from 1.8% in Q1 2017.”

“UK equities (-1%) did not appreciate the rise in the pound and prospect of higher rates. But the global equity mood has been very upbeat. The Nikkei 225 extended its winning streak to 16 sessions after the big win for PM Abe’s LDP. NZ’s equity rally reached 15 sessions on Tue. The Oct University of Michigan consumer sentiment survey revealed a record 15% of respondents placed a 100% probability on stocks rising over the next year, with a further 35% saying it was 75-99% likely.”

“Such bullishness warns of at least a correction at any time. The US equity wobble on Wed may or may not be a harbinger. But this threat does hang over AUD/USD, even after printing 3 month lows.”