Why Buying GBP/USD After BOE Meeting Isn’t A Good Strategy

Bank of England may appear more hawkish than ECB in near term, sell EUR/GBP?

GBP/USD rallied to one-year high after Bank of England’s meeting, as market focus turned to BOE’s guidance that “withdrawal of some monetary stimulus is likely to be appropriate over the coming months in order to maintain inflation around target”.

• We think the better-than-expected CPI data on Tuesday triggered the hawkish BOE comments earlier. Inflation climbed 2.9% in August.

• Policymakers said a rate hike is likely needed in the coming months if the economy keeps growing and inflationary pressures continue to build up. All of them believed rates could rise faster than expected.

• We think Sterling upside could be limited from current level, if we put aside US dollar. Market pricing for a rate hike to come in February shows investors are not ready. If policy makers were really worried about inflation, the vote today would not have been 7-2. Hence we do not expect GBP/USD to rally further much. We suggest to short EUR/GBP since BOE could act more hawkish than ECB in near term.

• Weaker pound since Brexit vote has given exporters revenue and earnings benefits. In other words, pound’s rally will hurt growth. Such scenario will slow the pace of BOE’s rate hike.

• Technical: GBP/USD may face resistance near 1.3450, highest level since August 2016

 

• EUR/GBP may have further scope to drop to 0.8820.