Sterling markets took the BoE as a dovish affair. Certainly there were no signs of the BoE "taking the opportunity" to be hawkish under the air cover of the Fed. In fact quite the reverse.
Where last week Chair Powell pointed to the US positive output gap for the next few years, the BoE highlighted that slack is likely to remain for a while to come. A key comment in the policy statement was that the MPC continued to feel it needed to lean strongly against downside risks to the outlook and ensure the recovery was not undermined by a premature tightening of financial conditions. The statement reads as a near deliberate attempt to distance the BoE from the Fed. Dec23 short sterling added 5 ticks straight afterwards and has edged that back to a net 3 now. Dec 2025 is a net 2bp higher. Cable down 60 pips afterwards.
I think that had it not been for the FOMC event, this BoE communication would be seen as on the hawkish side. Inflation is expected 'materially higher' than back in May, going above 3% later this year,. It's still still viewed as 'transitory' but the pressure could easily rise on the BoE to push back more, particularly if the labour market tightens. II think the reason why the MPC held back with more hawkish conclusions was the rise in Covid cases and the postponement of the reopening. Had it not been for that, there may well have been additional dissenters. My expectations would be that assuming a benign scenario for the delta variant, the 5 Aug meeting with the new inflation report could be more hawkish. Hence today might create opportunities for long sterling and short rates trades.
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