The Bank of England announces its latest decision this Thursday, and a 50bp hike looks highly likely now. Assuming Governor Bailey votes for 50bp, then we’d expect others to follow suit, generating a majority in favour.
The monetary policy channel has not been the primary driver of EUR/GBP lately, according to our short-term fair value model, where risk sentiment explains a larger portion of daily swings in the pair. The fact that markets are almost fully pricing in a 50bp hike this week and around 100bp of extra tightening after that by February 2023, in our view shows that a good deal of BoE hawkishness is already in the price when it comes to the pound. An already volatile FX environment suggests the pound could show sharp moves in either direction after the BoE announcement this week. But the risks related to a dovish repricing in the BoE curve continue to highlight the net monetary policy impact for the pound over the coming months should be largely negative, if anything. With the dollar potentially finding some stability this week, GBP/USD may start stalling around the 1.2300 level. When it comes to EUR/GBP - despite the lingering downside risks related to a full shutdown of gas supplies from Russia – we could see the 0.8400 work as a gravity line for now, with some potential BoE dovish repricing favouring a return to 0.8500.
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