BoE: Stuck in the middle - TDS

Analysts at TDS have removed the BoE rate cut from Q4 2017, and now look for the BoE to keep rates on hold through 2017-2018.

Key Quotes

“We still see a strong possibility of a rate move over the next two years, but view the probability of either a hike or a cut as sufficiently high as to prevent us from ruling one out and choosing the other as our base case view. Until the UK outlook becomes clearer, we choose the middle road for rates.”

“FX Strategy: Sterling has seen a moderate rebound as the UK economy remains resilient and some Brexit risks have diminished. With the GBP’s underlying fundamentals still vulnerable, however, we think this is only temporary and expect the downtrend in GBPUSD to resume in the weeks ahead.”

“Rates Strategy: In light of the change in our BoE call, we have increased our bond yield forecasts. We no longer expect a pronounced fall in Gilt yields in Q2, but continue to see a chance of a small fall as Brexit premia rises. We maintain a lower risk, long duration bias on 10y Gilts via a pay position on swap spreads and some exposure to Brexit risk via a 3y-1y GBPUSD cross-currency basis flattener.”