Good morning,

GBP: Hikesmas Day

He’s made a list, he’s checked it twice, we’re going to find out how rates will reprice, Carney Claus is coming to town…

Finally, after 10 years of economic hardship, market dislocation and political upheaval the Bank of England will, in all likelihood, raise interest rates later today.

So what?

It depends on how you come at the decision later today; either you believe that the Bank of England is hiking from a position of strength or hiking from a position of weakness. If you believe that the Bank of England is in a strong position then the key today is not what happens today but what they intimate as to what could happen in the coming 18 months or so. Similarly if this hike comes from a position of weakness then we have to ask why it is happening in the first place.

GBP: what could happen?

Obviously to most of you reading this, the reaction in the pound is going to be the key dynamic of the decision. We think that while the decision is basically a binary one (hold rates or hike rates) there are 9 scenarios that the Bank of England could put forward this morning.

The ‘worst’ for the pound would be decision to not hike at all and instead lean on forward guidance. In this scenario we would expect to see sterling lose around 1.5-2.0% of its value over the course of the day. Bearing that in mind we don’t see an interest rate rise as certain as ‘sun rises in the East and sets in the West’ but we’re pretty close.

The ‘best’ outcome for the pound would be a hike of more than 25bps which we also think is a very unlikely scenario.

The middle ground is where we think the Bank of England will actually fall. We think that the Bank will vote 7-2 to raise interest rates although we cannot discount a 6-3 vote. The more the decision is away from unanimity the weaker the reaction will be for sterling. Similarly, we are also looking for a commitment to ‘gradual’ interest rate rises. This would prove to be sterling positive although the language on inflation may weaken this argument.

Our base case scenario is that sterling rises today by around 0.5% but there will be few straight lines; it will be a very volatile day.

The decision and press conference is due at Noon. Our 6 things to watch for piece is available here and our webinar this morning explaining those 9 scenarios on what could happen begins at 10.30am. You can register here.

USD: Powell Up

According to yesterday’s Wall Street Journal the White House has told current Fed Governor Jerome Powell that it intends to nominate him for the role of Fed Chair. He is a centrist of the Fed having never dissented from the consensus and as much as Yellen was cast as the Uber-Dove her removal will not spell the end of a Federal Reserve that doesn’t want to startle the horses. We maintain that rates will rise in December and probably twice again in 2018.

Have a great day.

Jeremy Cook, Chief Economist