Sell EUR/GBP on rallies – Rabobank

FXStreet (Delhi) – Jane Foley, Research Analyst at Rabobank, suggests that there is clearly a long way to go before headline inflation at 0.2% y/y returns to the Bank’s 2.0% target.

Key Quotes

“Although the January minutes state that the MPC focussed this month’s discussion on the softness of oil prices, there was clearly a discussion about market volatility on the back of concerns about the Chinese economy. If market volatility were to extend this year, this would provide the MPC with further reason to delay the first rate hike of the cycle; since heightening volatility can have a depressive impact on investment.

For similar reasons uncertainty surrounding the UK’s forthcoming referendum on EU membership has the capacity to push back the first BoE tightening. That said increased political uncertainty, however, would likely depress GBP which could increase UK inflation prospects in the medium-term.

Overall, MPC members continue to have a range of views about the balance of risk to inflation and these stem from views about the external environment in addition to the outlook for the strength of UK output and domestic demand. The moderation of UK pay growth in recent months has been a source of concern for policy setters in recent months. The Bank refer to regular private sector growth as having increased from around 1% to 3% over the spring 2015 but then have fallen back to around 2.3% in the three month to October.

Expectations of a delayed start to the BoE’s rate hiking cycle and political uncertainty surrounding the UK’s future in the EU has already taken its toll on sterling this year. Although political risk has the capacity to weigh heavily on the pound going forward, the previous strength of sterling continues to be referred to by the MPC as a factor curtailing UK inflation now.

Overall, we see November 2016 as the earliest opportunity for a BoE rate hike this cycle. Given that sterling appears to have adjusted to a move dovish BoE outlook, we would look to sell EUR/GBP on rallies in the near term given the likelihood of a dovish message from the ECB later this week.”

Jane Foley, Research Analyst at Rabobank, suggests that there is clearly a long way to go before headline inflation at 0.2% y/y returns to the Bank’s 2.0% target.

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