BoE Reaction: Risk-reward doesn't favour chasing near-term GBP upside - ING

No doubt the 5-3 MPC vote split at today's BoE meeting - with three members calling for an immediate hike - was a surprise for GBP markets, explains Viraj Patel, Foreign Exchange Strategist at ING.

Key Quotes

“The pound initially moved around 0.8% higher against both the dollar and the euro on the headlines. However, the post-election rise in domestic political - as well as Brexit policy - uncertainty should arguably have led the Bank to retain a more cautious tone at this meeting. Some may suggest one could argue that it is a tad irrational for some MPC officials to consider hiking rates at this stage - especially given that the cost of above -target inflation doesn't outweigh the long-run growth uncertainties stemming from Brexit.”

“It is worth bearing in mind the fact that the hawkish calls today have been from external members and this shows the clear divergence of views between the "insiders” and “outsiders" within the MPC. This is not the first time we've had this; history tells us you that it may be prudent to side with the view of the core MPC members – who clearly place a greater preference on the economy and output gap.”

“As such, we don't think GBP markets are likely to buy into these hawkish calls once the dust settles and evidence of a slowdown in UK economic gains traction. This is certainly where our economists see the balance of risks; the knee-jerk GBP move higher could prove to be short-lived given that a sustained hawkish BoE re-pricing looks highly unlikely.”

“GBP implications: Risk-reward still doesn't favour chasing GBP upside at present given the degree of political and policy uncertainty. While the bar for a significant move lower in the pound has decreased, we still think the near-term risks to GBP/USD lie towards 1.24-1.25. For EUR/GBP, a slightly more hawkish BoE could provide a buffer and prevent a breach of 0.90; still our view remains that a 0.88-0.90 range is likely over the summer period (if we also take stock of ECB-driven EUR strength).”