The following are the expectations for the BoE February Inflation Report on Thursday as provided by the economists at Goldman Sachs, UBS, Morgan Stanley, and other major banks along with some strategies to trade the GBP into event as provided by the FX strategists at these banks.
Goldman: We expect the BoE QIR to deliver a modestly hawkish message to the market. The BoE is likely to acknowledge the weak near-term inflation outlook, but also resist some of the recent decline in market pricing of Sterling forward rates by signaling a faster return to the 2% inflation target than in the November Inflation Report. We expect the Inflation Report to show inflation reaching the 2% target earlier than in the November projections, settling above 2% at the three-year horizon. While the weakness in projected near-term inflation would suggest that rate hikes are not imminent, a faster rebound in projected inflation to the 2% target may reconnect Sterling rates to domestic macro data, steepening the front-end of the yield curve as highlighted by our rates strategists. We expect that this will be reflected not only in this week’s Inflation Report, but in strong performance of GBP vs much of the G10 through 2015, How to position? While we remain cautious on Cable given our conviction view for broad-based USD strength (we forecast 1.48 in 12 months), we continue to think that EURGBP downside remains one of the best expressions of a positive GBP view given the clear divergence in the macro outlook and monetary policy between the UK and the Euro area. We forecast EURGBP at 0.73 in 12 months, 0.70 at end-2016 and 0.65 at end-2017.
Credit Agricole: The main focus turns to the inflation report, due on Thursday. According to our economists a strong upward revision to growth forecasts is likely. Still, well anchored medium-term inflation expectations and steadily rising pay growth are expected to enable the BoE to look through the muted short-term price developments. As such, this week’s events may have the potential to drive the GBP higher from the current levels, for instance against the EUR. We remain short the cross.
UBS: 1- Certainly not all bad news on growth. Revised forecasts from the Bank of England in the February Inflation Report should show a still relatively upbeat growth outlook. Falls in the oil price and lower yields since the November Report are tailwinds for the consumer, though GDP revisions and some appreciation of sterling push in the opposite direction. 2- Big revisions on near-term inflation. The biggest change in the MPC’s forecasts will come from much lower inflation projected for 2015. But it is not clear this should spill-over into lower two and three year ahead inflation views. If anything we expect the Bank may nudge its forecasts for those years higher, or put an upside skew on the distribution. 3- FX: NEER at new highs to test BoE tolerance. Governor would probably express some degree of disappointment that despite his warnings at the previous inflation report, sterling’s nominal effective exchange rate has hit a new high. EURGBP was already under pressure and GBPUSD’s recovery will likely add to current price headwinds. While we doubt the currency are at levels to warrant direct concern, escalation in rhetoric, especially in the context of greater risks of missing the inflation target, presents a risk to upside positioning heading into the report.
Credit Suisse: Our economists expect a slight hawkish surprise from the February Inflation Report due tomorrow: – While the MPC is not in a hurry to raise rates yet, it might want to signal that the market has priced the rate hike too far out and introduce a two way risk. Hence the MPC might not validate market interest rate expectations by making inflation exceed the 2% target by the end of the forecast period. However, this Inflation Report scenario appears to be increasingly taken into account by the market with our rates strategy team taking profits on their short Jun-16 short sterling recommendation.
Barclays: After better-than-expected UK PMI data last week, the focus for GBP will turn to the BoE Inflation Report (Thursday) which is likely to provide some clarity on the Bank’s outlook given recent conflicting communication from MPC members. We expect the BoE to acknowledge downside risks to short-term inflation, but upside risks to medium-term activity and wages. Relative to November, inflation forecasts are likely to be revised down in order to take into account most recent development in oil prices. Although very low UK inflation, a dovish BoE and weak euro area economic activity likely will continue to weigh on GBPUSD in the coming months, robust UK economic growth and the likely re-emergence of inflation towards the end of 2015 continue to pose upside risk to our GBPUSD forecasts.
Citi: Today’s Inflation Report presents upside risks for GBP given dovish market pricing on MP.
Morgan Stanley: We still expect GBPUSD to reach 1.38 by the middle of the year but look for higher levels to sell at, given the risks building for a bit of a USD correction. The focus this week will be the BoE’s Inflation Report, which the market is likely to expect to be dovish, given the recent low CPI print (below 1%Y). Markets will be focused on whether the report suggest that the BoE will keep rates on hold for a bit longer, given the low inflationary environment