UK: A hawkish shift – HSBC

Analysts at HSBC explain that although Brexit was firmly on the agenda, it was the hawkish BoE that was most influential and their change in tone meant GBP was the best performer in G10 in September.

Key Quotes

“In the days ahead of the rate decision on 14 September, UK inflation data was released with CPI rising to 2.9% YoY (above expectations of 2.8%) on 12 September. The market responded to this hawkish news and cable rallied by around half a percent. The labour report on 13 September was more mixed; the unemployment rate fell to 4.3%, a fresh 42-year low, but wage growth remained stagnant at 2.1%. Cable subsequently reversed the rally seen on the previous day.”

“On 14 September the BoE left rates unchanged. However, the MPC shifted to a more hawkish bias, indicating that monetary tightening is likely to occur ‘over the coming months’. This saw the FX market rush to price in the increased probability of a rate hike. The BoE Governor Mark Carney agreed that the chance of a hike had ‘definitely increased’, and cable rallied sharply to above 1.34. The next day the rally was extended as MPC member Gertjan Vlieghe, historically seen as a dove, echoed this hawkish message by stating that the appropriate time for a hike ‘might be as early as in the coming months’. Cable moved up sharply once again, punching above 1.36 and making the total gains over 14/15 September equal to 3.0%. Carney spoke again on 18 September, but this time tempered the hawkish tone by stating that future rate rises could be expected to be limited and gradual. Cable subsequently fell to end the day below 1.35.”

“On 20 September, much stronger than expected retail sales of 1.0% (0.1% expected) helped cable grind higher and reach 1.3657 a 15-month high. The focus for GBP then moved away from monetary policy to politics; Prime Minister Theresa May’s eagerly anticipated speech on Brexit took place on Friday, 22 September. The Prime Minister strongly hinted at a preference for a  two-year transition period and acknowledged the UK’s financial obligations to the EU. Coincidentally, on the same day Moody’s downgraded the UK’s sovereign rating from Aa1 to Aa2 due to Brexit uncertainty. Official Brexit negotiations then got back underway on 25 September and cable fell after the EU’s Michel Barnier warned that no transition deal would be discussed until sufficient progress had been achieved on other key issues.”