MUFG's Derek Halpenny notes that the British Pound (GBP) has been the strongest G10 currency after the US Dollar (USD) since the Middle East conflict began, with attention now on the Bank of England’s (BoE) July decision. Halpenny expects the BoE to stay on hold but sees inflation and energy risks keeping rate hike pricing intact, supporting GBP as FX volatility remains remarkably low and market conditions favourable.

BoE on hold but risks tilted higher

"The pound remains the top performing G10 currency after the US dollar since the conflict in the Middle East began at the end of February and following the FOMC decision last night, the focus shifts today to the BoE policy decision."

"There is nothing priced for today and hence the issue for the markets will be the vote, the communication in the statement, the minutes and the updated forecasts in the Monetary Policy Report. So there’s a lot of information to get through but ultimately the take-away is likely to be that the MPC remains somewhat divided with some concerned over inflation pass-through from energy and others less concerned given the relatively weak domestic economic conditions."

"A September hike is priced at a little over 50% while a hike is fully priced by November, so the rates market is more priced for some signs of increased concerns shifting the MPC toward a hike."

"For market rates to move higher and the pound to advance in response to today’s meeting we will need to see increased conviction on a September rate hike. We expect the multi-scenario approach to be abandoned with a return to a single set of forecasts but accompanied with some risks."

"We expect the pound to remain well supported at these levels on the assumption that pricing for a September rate hike holds up given the rising external inflation risks."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)