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BOE-Brexit constraint to limit GBP support

Posted by Marge Maresca on Sep 11, 2017 7:36:46 PM

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GBP might be doing well against the USD but the MPC will be more focused on its performance on a trade weighted basis where the exchange rate has been heading back toward its Oct 2016 lows. If this weakness accelerates and is seen as a function of diverging policy differentials then this is a risk that could see the BoE make an adjustment to interest rates. However, for now the BoE will have to make do with yet more tough talking maintaining that monetary policy “could need to be tightened by a somewhat greater extent” than implied by the market. There will be an attempt to highlight the inflationary impact of the recent fall in GBP TWI but countered by continued concern over consumer spending and a need to watch investment and wages. The BoE has been attempting to sound hawkish but its message continues to be ignored by the market due to Brexit negotiations. Given the uncertainties of Brexit it is going to be difficult for the BoE to adjust its communication in a meaningful way. Over the last few weeks it has become clear that the risks of a breakdown of Brexit negotiations and a cliff edge scenario have increased, but the BoE will persist in assuming a smooth Brexit. We continue to expect the BoE to remain on hold over the next 2-years and at least until there is greater clarity over the Brexit process. 

 

Topics: GBP/USD

 

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