GBP: Heading north? - Rabobank

Analysts at Rabobank point out that while most of G10 currencies weakened versus the USD since the beginning of the week, sterling firmed to the highest level since June 2016 on the back of stronger than expected UK August CPI inflation at 2.9% y/y.

Key Quotes

“In the August BoE policy meeting just two members of the MPC voted in favour of an immediate rate hike in August. This had steered GBP lower since in the previous meeting there had been three hawkish votes before Forbes’ term came to an end in June.  However, the fall in the number of dissenters last month belied the hawkish takeaways that were contained within minutes of last month’s policy meeting.  The BoE warned that “monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the path implied by the yield curve underlying the August projections”. This guidance, combined with the strong UK CPI inflation data triggered short-covering pressures in sterling.”

“Further support for the pound can be taken from the UK government’s scrapping of the public sector pay cap which also increases the risk of a hawkish reaction from the Bank.”