MUFG’s Lee Hardman reports that the Pound has benefited from broad US Dollar weakness, with GBP/USD briefly above 1.3500 and EUR/GBP near 0.8300. Markets expect the BoE to deliver its first rate hike since the US-Iran conflict began, though MUFG anticipates cautious forward guidance and fewer hikes than currently priced, limiting but not reversing recent Pound strength.

BoE set to hike with cautious tone

“The pound has benefitted from broad-based US dollar weakness after the Us mid-erm elections resulting in cable rising briefly back above 1.3500 yesterday. At the same time, the pound continues to trade close to year-to-date highs against the euro with EUR/GBP moving closer to the 0.8300-level. The outperformance of the pound over the past month has been encouraged by building optimism over stronger growth in UK and for the BoE to tighten policy in response to upside inflation risks.”

“The BoE is finally expected to begin hiking rates today for the first time since the US-Iran conflict began. BoE officials including Governor Bailey have clearly stated recently that time is running out to keep looking through higher energy prices.”

“A 25bps hike is almost fully priced in today so the market reaction will be determined more by the updated forward guidance. We expect the BoE to signal that further tightening is likely to be required but not as much as currently priced in. the Uk rate market had been pricing in 4-5 hikes although that has been scaled back as the price of oil has dropped sharply this week.”

“There are currently around 90bps of hikes priced by September of next year. It is moving towards our own forecast for 2 hikes from the BoE.”

“While cautious guidance over further hikes could put a dampener on recent pound strength, we do not expect it to trigger a significant reversal lower for the pound.”