GBP: BoE may talk up a Nov hike; watch for Tory Party conference noise - ING

The highlight for GBP markets today will be a speech by BoE Deputy Governor Broadbent; policy comments aren’t necessarily guaranteed, but any reference to tightening would reaffirm the markets bias towards a Nov BoE hike, suggests Viraj Patel, Research Analyst at ING.

Key Quotes

“As for Brexit, the fourth round of negotiations failed to show signs of any meaningful progress towards a transition deal being signed, sealed and delivered. Although the near-term focus shifts to the Tory Party Conference (which begins this weekend), we continue to see a Brexit transition deal as the next big directional catalyst for our GBP outlook. From a cyclical perspective, we see three supportive channels for the currency on the back of a transitional deal being agreed: (1) reinforced BoE policy tightening sentiment and a steeper UK rate curve – with the potential for markets to add a couple of hikes to their BoE tightening cycle assumptions; (2) a recovery in investment activity which would lead to a positive revision to the UK’s growth outlook; (3) a reduction in GBP downside tail risks stemming from cliff-edge Brexit risks being pushed further down the road.”

“While the merits of a two-year transitional period are clear, we note the finer details – such as the precise budgetary and judiciary conditions of a transition phase – still need to be ironed out by UK and EU officials. This may well be the focus of Brexit talks for the remainder of the year and therefore we retain a constructive GBP outlook on the hopes that an ‘economically rational’ Brexit – one that reduces some of the uncertainty clouding GBP markets – can be achieved. A combination of these cyclical forces could inject some modest upside to pound over the coming months, with GBP/USD potentially moving up to 1.38-1.40 by year-end. Equally, we could see EUR/GBP trade in a slightly lower range of 0.85-0.87 on the basis of a swift transition deal being agreed.”