GBP: Forward guidance returns. Is the market listening?
Yesterday's Bank of England (BoE) 6-3 vote for unchanged rates came as no surprise. What was a surprise was the re-introduction of forward guidance – i.e., that 'monetary policy is likely to need to be restrictive for an extended period of time'. Clearly, the BoE is trying to prevent the premature easing of financial conditions which would be inconsistent with policy still threatening a further hike. Arguably, their intervention here did have some impact on markets where the Sonia Dec 25 futures contract – which was briefly up 16 ticks on the day – only ended up 11 ticks. This is in an environment of softer money market rates globally.
Investors know that forward guidance is used as a tool by central bankers (remember the Fed in 2021 saying that rates would stay at zero until 2024?) and it looks like the next nine months will be a game of cat and mouse as investors push for rate cuts and the BoE fights back. We think data will probably support investors and see upside risks to our year-end EUR/GBP forecast of 0.8700. GBP/USD should do a little better today in the risk-positive environment. Favour a test of 1.2250 above which 1.2335 opens up.
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