Pessimistic BOE Shakes but Doesn't Break Sterling

Sterling has neared the 50% retracement of the 11.5 cent decline since mid-December.  It is found near $1.4660.  After easing ahead of the BOE announcement, sterling was sold to $1.4530 on the initial headlines that showed the BOE was cutting its growth, inflation, and wage forecasts.    However, the short-sterling futures had already largely discounted the rates being low for longer, and UK debt instruments also sold off, and after the initial flurry, sterling stabilized and recovered nearly fully. 

BOE Governor Carney wants it both ways.  While the central bank is in no hurry to raise rates, he cautions that the market is not pricing in sufficient tightening for the BOE to reach its inflation target.   The BOE projects the 2% inflation target will be reached in early 2018.  This assumes that the market is right, and the first hike is in mid-2017 and reaching 1% in Q3 2018.   Carney seems to imply that it could happen earlier.  

The BOE cited international factors weighing on the UK outlook.  Emerging markets were specifically cited and downside risks to the world economy.  Carney observed that resilience of sentiment ahead of a referendum on EU membership, which is expected around in late-June.

The BOE's forecasts include CPI rising slowly to 1.2% in Q1 17. 
This is down from the 1.5% forecast in November.  The wage growth forecast was revised lower to 3.0% this year from 3.75% previously.  This year's GDP forecast was shaved to 2.2% from 2.5%.  The MPC sees 2017 growth at 2.4% and 2.5% in 2018.  

The one hawk (McCafferty) who has been dissenting in favor of an immediate hike for six months, capitulated and rejoined the rest of the MPC.   However, the MPC pushed back against speculation that there could be a near-term cut in rates.  It noted that growth remains firm, and in fact, the PMIs this week, suggest possible acceleration in here in Q1.  Carney specifically indicated that the entire MPC expects the next move to be a hike. 

We assume sterling will take out the $1.4665 area.  Our next target is near $1.4745.  Sterling may continue to lag on the cross against the euro.   We look for the euro to retest the  GBP0.7755 high from last month.  A convincing break of JPY170.80 could see sterling slip toward JPY169.50.  

Pessimistic BOE Shakes but Doesn't Break Sterling Pessimistic BOE Shakes but Doesn't Break Sterling Reviewed by Marc Chandler on February 04, 2016 Rating: 5
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