FxWirePro: Fed and BoE Monetary Policies’ Previews and Reviews – Short Sterling Trades

In a widely anticipated move, the US Federal Reserve lowered interest rates by 0.25% last night, taking the Fed Funds target range to 2.00-2.25% and announced an early end to its balance sheet run-off. Moreover, Fed chair Powell suggested that further cuts could follow, noting that the Committee will “act as appropriate to sustain the expansion”. However, he also cautioned against expecting significant easing, signaling that the rate cut was a “mid-cycle adjustment” and not the beginning of a “lengthy cutting cycle”.

In contrast to the Fed, and indeed the ECB, the message from the Bank of England has for some time pointed to the need for gradually higher interest rates. The Bank of England is almost certain to vote unanimously to keep Bank Rate unchanged at 0.75% when it delivers its latest policy decision at midday. However, the minutes to the meeting and the accompanying quarterly Inflation Report are likely to talk of the likely need for limited and gradual increases over the forecast horizon, given that the BoE’s forecasts will remain conditioned on an orderly Brexit. 

However, relative to previous meetings, we expect the committee to display little increase in appetite to tighten policy soon, especially with so much uncertainty clouding the outlook. Recently, two of the most hawkish MPC members, Messrs Haldane and Saunders, indicated their preference to keep rates unchanged for now. 

The BoE faces a potentially tricky task on how to present their new economic forecasts. Its forecasting convention follows government policy for Brexit (an EU deal) but that is becoming increasingly inconsistent with market interest rates, which are also used in the forecasting process. No-deal risks have become more prominent in investors’ minds, partly reflected in markets fully discounting a 25bps cut in Bank Rate over the coming year (see chart). How the BoE gets around its conditioning conundrum is unclear, but it is likely to be a key question that Governor Carney faces at the 12:30BST press conference. 

Ahead of the announcement, the UK manufacturing PMI for July is released at 09:30BST and will provide an update on confidence in the sector. After falling in the past three months, we forecast the headline balance rising to 48.5 from 48.0.

However, crucially it is expected to remain well below the key 50 level (which separates expansion from contraction), in keeping with the broader slowdown in the global manufacturing sector.

Among idiosyncratic themes, stay short GBP on Brexit uncertainty and BoE dovishness; hold short GBPJPY but take profits on GBPCHF, rotating into the short cable.

Short hedge: Alternatively, on hedging grounds ahead of BoE that is scheduled for today, long-term investors are advised to stay short in futures contracts of mid-month tenors. The writers of the futures contract are expected to maintain margins in order to open and maintain a short futures position. Courtesy: Lloyds bank

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