Pound Slides as Bank of England Rate Hike Not Seen as Imminent – 2 Feb, 2017

The pound snapped a two-day rally and gilts rose after the Bank of England signaled that a policy tightening wasn’t imminent.

Sterling rose initially after the central bank said that some within its committee had become more concerned about accelerating inflation and that they were “closer to those limits” of tolerance. It reversed gains after a fuller reading of the statement showed that the monetary authority’s forecast for peak price growth was 2.8 percent for next year, well within market expectations. It also said that there is more slack in the economy than thought, suggesting that policy makers aren’t close to raising rates anytime soon.

• Sterling fell 0.8 percent to $1.2557 as of 1:13 p.m. in London and yields on benchmark 10-year gilts fell six basis points to 1.386 percent
• U.K. money markets are currently betting that the Bank of England will raise interest rates by 25 basis points by August 2018
• Carney Braces for Brexit Twists as BOE Inflation Unease Grows: Link
• U.K. Seeks ‘Freest Possible’ Banking Trade Deal After Brexit: Link

Less Hawkish

• “The market expected higher inflation forecasts and therefore today’s outcome is not a hawkish surprise,” Manuel Oliveri, a strategist at Credit Agricole CIB, said in e-mailed comments; the long-term growth outlook is changed only marginally and the long-term growth uncertainty remains intact; “There is no indication of BOE considering higher rates anytime soon.”
• “Limited changes to the inflation forecast strike us as more dovish than the market baseline heading in,” Josh O’Byrne, strategist at Citigroup, said in e-mailed comments. “Moving the assessment of labor-market slack also buys some time when interpreting inflation overshoots and robust activity.” O’Byrne expects monetary policy to offer less support to the currency.
• “The BOE sees more labor-market slack, and it’s only some members who are hawkish,” said Neil Jones, head of hedge-fund sales at Mizuho Bank Ltd. “There are no hikers in the MPC despite recent inflation concerns stemming from the weak pound and an apparent lack of tolerance. A rate hike is not yet on the cards as some market participants are sensing.”
• “Now that the Bank of England is out of the way we think it is a good time to enter GBP shorts, according to Deutsche Bank. “We remain very bearish on the pound targeting a move close to parity in both GBP/USD and EUR/GBP,” strategist Oliver Harvey said in a note to clients.

Source: Bloomberg