FX & CFD trading involves significant risk
This week, the focus is on the Bank of England's policy meeting and on Sterling's reaction to the announcement of what we expect to be a substantial easing package.
Ahead of a substantial easing package from the BoE: Our UK economist Andrew Benito expects: (i) a 25bp cut to Bank Rate, with a 30% probability that the BoE cuts Bank Rate by 40bp, (ii) the announcement of £100bn of purchases of government and corporate bonds, distributed over a period of 6-months, and (iii) a very dovish MPC significantly downgrading UK growth and providing forward guidance on the future path of policy.
While the rate cut is fully discounted in the forwards, we think there is scope for the currency to weaken as the other elements of the policy package are announced and the BoE updates the economic and inflation outlook. An expansion of the asset purchase facility by £100bn, approximately equal to 10% of UK GDP on an annualised basis, would be a sizeable surprise relative to market consensus, which we estimate at around £50-75bn. While Sterling shorts are sizeable - a potential source of vulnerability to our view - we have showed that speculative positioning for the Pound historically has been a leading (not a contrarian) signal.
We expect more weakness in Sterling...: Sterling fell by about 11% in trade-weighted terms right after the vote on EU membership. But, contrary to our view of further weakness, the Pound has traded in a narrow range since the new government has been in office. Over the next 3- to 12-months, we are comfortable with our view that the slowdown in economic activity will drive the currency lower(we forecast £/$ at 1.20 and 1.25 and EUR/£ at 0.9 and 0.80 in 3- and 12-months, respectively).
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