The Bank of England raises rates: Bearish for the pound

The Bank of England (BoE) raised rates for the first time in more than a decade and the pound dropped. What is your reading of this?

Bastien DRUT: The reaction of the pound to the MPC (Monetary Policy Committee) has been very negative. The pound experienced its biggest daily loss versus the Euro since the Brexit referendum and the UK 10 year declined by around 10 bps on the announcement. Globally, we have a bearish view on the pound. The Brexit negotiations are falling behind and the risks of failure are rising gradually. The BoE itself states that “There remain considerable risks to the outlook, which include the response of households, businesses and financial markets to developments related to the process of EU withdrawal.” The uncertainties linked to the Brexit are already weighing on the macro indicators, which will prevent the BoE from pursuing a standard rate tightening cycle and this environment is negative for the currency. We also should underline that the UK is one of the countries with the largest current account deficit in the world as there has been little improvement of the current account dynamics despite the pound depreciation that followed the referendum. The latest data indicates that the market is only slightly short GBP and we think that this view is too optimistic.

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