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From the Floor: BoE to rule on rates amid Brexit uncertainty

#SaxoStrats
  • •  BoE rate meeting decision due at 1100 GMT
  • •  BoE guidance likely to be about a one-rate-hike normalisation: Hardy
  • •  If GBP rallies on the BoE, GBPUSD has room overhead towards 1.35: Hardy
  • •  EURUSD pushed above 1.900 yesterday before reversing slightly
  • •  Slowdown seen in many equity markets: Garnry
  • •  BMW Q2 operating profits beat expectation and company raised guidance
SaxoStrats banner
 By John Acher

The Bank of England's policymakers meet on Thursday amid persistent uncertainty about the impact of Brext on the British economy. 

"It's 'Super Thursday' for the Bank of England. There's a lot of focus on the voting pattern," says Hardy. 

"If I was sitting at the Bank of England, I would like to look at inflation over the next few months before making any decision," Hardy says. "Any rate outlook from here is about a one-rate-hike normalisation rather than the beginning of a bigger programme, unless we were to see a massive pound devaluation." 

The pound's weakness after the Brexit vote has fed through into inflation. 

"It's all about Brexit uncertainty and that grinding uncertainty from here," says Hardy, adding that he does not expect the BoE to deliver strong signals on its intentions on rates. 

A more-hawkish-than-expected BoE could put the focus on EURGBP, which has been at the top of its range recently, while a dovish bank could put the focus on cable downside, Hardy says. 

If sterling rallies on the back of the BoE, there is room overhead for GBPUSD towards 1.35, which is a massive technical level going back to the 1980s, says Hardy. "It is going to require quite a chunky selloff back below 1.30 to get an indication that this breakout to the upside has been a false one." 

GBPUSD with room to rally
GBPUSD
Source: Saxo Bank

 EURUSD pushed above 1.900 late yesterday before reversing slightly.

Many equity markets are showing signs of a slowdown. 

"We are in tight ranges in Japan (...), we are in a range also for the yen against the dollar. And for the Nikkei to move higher, we need either a weaker yen or stronger earnings data or outlook/macro data," says Saxo Bank's equities strategy chief Peter Garnry. 

"So for now we are flat in Japanese equities. We have been bullish for quite a while, and I think it is time to be more neutral on Japan although we still like the valuation spread to Europe and the US," Garnry says. 

The strong euro is holding back momentum in European stock markets, with Germany's stuck just slightly north of 12,000 points. 

"European equity markets are heavily geared towards exporters, and they are obviously seeing an impact on their short-term growth and revenue and profits from the stronger euro," says Garnry. 

German car-maker BMW's second-quarter operating profits beat expectations, and the company raised guidance. 

Emerging-market equities are up 25% in USD terms year-to-date, which makes them the most expensive on enterprise value to EBITDA that they have been since 2009, "So we are definitely moving into new territory here for emerging-market equities," says Garnry. 

Fixed-income markets were mainly quiet, with government bond yields largely unchanged and the 20-year bund yield staying around 50 basis points. 

GBPUSD
 Persistent Brexit uncertainties limit sterling's upside potential even if 
the Bank of England strikes a hawkish pose


John Acher is a consulting editor at TradingFloor

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