The Bank of England maintained the Bank Rate at 0.25% and kept targets for bond purchases as expected. The vote count was 6-2, which was in line with our call, but against the view of some houses. We still view the core of the Monetary Policy Committee (including governor Mark Carney) as being tilted to the dovish side.
As expected the BoE announced that it is ending the so-called Term Funding Scheme (TFS) in February 2018, as the BoE has been more worried about credit growth recently.
We still expect the BoE to remain on hold until the Brexit negotiations are concluded in Spring 2019. The main reasons are that we think the BOE is still too optimistic on both wage growth and GDP growth and political uncertainty remains high due to Brexit.
EUR/GBP rose sharply and broke above 0.90 on the announcement, as expected given the dovish twist from BoE. The market now implicitly indicates around 35% probability (8.5bp priced) of a November rate hike compared to 9.5bp priced prior to the BoE announcement.
Over the coming 1-3 months, we expect EUR/GBP to test higher levels on the back of a strong EUR and BoE repricing. We lift our 1M and 3M EUR/GBP targets to 0.91 (previously 0.88) expecting the cross trade within a narrow range of 0.90-0.92.
Over 3-12M, we continue to see some stabilisation in GBP, expecting EUR/GBP to drift back below 0.90 on the back of potential for some clarification regarding Brexit negotiations and valuations.
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