Good morning,

GBP: Mistaken for Doves
The drive higher for sterling from Thursday’s Bank of England meeting was continued on Friday by a speech by Bank of England member Gertjan Vlieghe that saw one of the most dovish members of the Monetary Policy Committee lean into the argument and say it may be time for rates to rise in the coming months.

We believe that a rate rise is now nailed in November and while we also believe this is a policy mistake and our minds harken back to the European Central Bank’s hiking schedule in 2011, we have to hope that 25bps is not enough to destabilise the UK economy any further.
I was interviewed by Bloomberg on the matter on Friday afternoon and you can watch the segment here.
Bank of England Governor Mark Carney will speak later this afternoon at the IMF in Washington and comments around global growth and inflation will be parsed for further hints on what the genesis of a hiking Bank of England may look like. We will go through all the political news of the weekend in today’s Sterling Update published later this afternoon.

GBP: Momentum on its side for now

Sterling has rallied on the news – seeing its 3rd biggest weekly gain for 40 years – but further advances will depend on stronger economic and political foundations. GBPUSD is a messy cross of two really ugly currencies. We are not going to lie and say that we expected the Bank of England to raise rates this year but we have to now start shifting forecasts not just on what may happen in November but further on down the curve; is this a one-and-done move that cancels out the emergency cut made following last year’s referendum or is it the start of something else i.e. a series of rate hikes.

As it stands at the moment we think that a one-and done hike would probably top out GBPUSD at about 1.3750. The dollar is not helping and traders remain happy to sell USD hand over fist on fears over a slowing US economy and concerns over the ability of the Trump administration to meaningfully craft and execute a message on tax, regulation or North Korea.
Following the BOE meeting yesterday and the likelihood that the Bank of England will hike in November we have upgraded our end of year expectations for GBPUSD from 1.25 to 1.32.
GBPEUR or EURGBP has turned into the ‘Brexit cross’ and as such sterling has underperformed against the euro compared to the US dollar in the past 2 sessions. Our beginning of the year thoughts on GBPEUR of 1.10 still feel correct with limited sterling upside seen from a weak economy and a poor wage outlook.

EUR: ECB Chief Economist remains dovish

In an interview on Saturday European Central Bank Chief Economist told an interviewer that “I do constantly hear people asking whether it is time to start tapering. But underlying inflation remains too low. We have to be patient and persevere with our policy, a substantial stimulus is still necessary. Everyone agrees that we have to make sure that the reduction of the stimulus takes place in an orderly manner, without any excessive shocks.”
EUR has naturally slid against the resurgent pound but still wants to spend more time above the 1.20 level against the USD. Today’s inflation number at 10am may be the impetus.

Have a great day