BoE Primer - November Meeting

Tomorrow we will be hearing from the Central Bank which appears to have performed a rapid about-face in its monetary policy stance. You guessed it - it's the Bank of England. The decision comes at midday. 

Source: Bank of England 

Central bank speakers from the past couple of weeks have grown more and more hawkish and some have even gone as far as to say that a rate hike could be imminent. Well the theme of this blog post from me is to hold your horses! Remember that a vote has to be held by the MPC and its not just a dictator game, we could see some voting for hikes and others voting to keep things on hold, but personally I just don't believe the BoE will hike before Christmas and add even more pain to the consumer balance sheet. 

Below, we have the market implied interest rates for the upcoming Bank of England meetings. The current base rate is 0.1%, so an implied rate of 0.2% tomorrow means that clearly the market is assigning a non-zero probability to hikes. In fact, derivatives markets were showing a 64% probability of a 15 basis point hike as of Monday!

Source: Refinitiv

Source: cTrader for FXPro. 

I think the market is wrong here. The above chart shows GBP since near the start of October, and when the hawkish noises were first made you can see the spike in GBP up to the red bar. This was around the mid 1.38s, but the market has pulled back quite significantly as many of these views of higher rates were unwound as it is viewed as the Bank of England making a policy error. 

For the uninitiated, higher interest rates generally correspond to stronger currencies. My view is that the market is currently too aggressive on rates, and that in actuality the Bank of England will hike very slowly. 

Again going back to the implied rates table above, it is absurd to me that the Bank of England will hike to 1.25% by end 2022. This is a laughable notion. I'd be amazed if they got to 75bps by then - to go higher will simply choke off the economic recovery. 

The trade then, is to be short GBP. However, in this case, I would do it via some limited downside means and probably opt for put options in GBP. Preferably, I'd look about 2 months out and target 1.35 as a downside marker. My view is these views on hikes are laughable, fanciful and ridiculous, so short GBP is a worthy play. The other way to express the view would be via the crosses - preferably something like a long EURGBP or short GBPCAD. 

What is also interesting is that markets are expecting interest rates in the UK to come back down after 2022. This means the market basically thinks the Bank of England is actually going to make a policy error and over-tighten! All the more reason for this view that the market is too aggressive on GBP rates. 

In a recent piece (see GBP: Hawkish harping not credible), I outlined a number of the reasons for my bearish view of GBP, and I stand by those here and will not repeat them. If the BoE does hike tomorrow, then I'd want to short GBP anyway since it's clearly a mistake.