Sterling, McCafferty, and BOE Policy

Sterling’s advance today is being attributed to comments by a member of the Bank of England’s Monetary Policy
Committee McCafferty.
  However, we suspect it was a news item that was
used to justify the price gains that was already underway.  

Sterling had been sold to a two-week
low early yesterday as BOE Deputy Governor Broadbent confirmed our suspicions
that he would side more with Governor Carney than the hawkish wing. 
Sterling rebounded after the employment
report.  After reaching almost $1.2810, sterling
recovered almost a full cent.  Today it set the week’s high of

McCafferty is a hawk.  He was part of the dissents in last
month’s 5-3 vote to keep rates steady.  He had dissented last year, but
failed to convince anyone and moved back with the majority.  In today’s
remarks, he did not say what the BOE would do.  He opined on what it should
do, which is “think” about reducing its balance sheet.  

First, recall that McCafferty opposed the restarting of asset purchases
after last year’s referendum. 
That he wants an early unwind is
consistent, but hardly new.  Second, McCafferty said other central banks
were considering this.  Really?  Besides the Federal Reserve, which
central banks are considering unwinding QE?  Try rounding up the suspects,
but there aren’t any.  No BOJ, No ECB.  No SNB.  No
Riksbank.  At most the ECB is talking about changing its forward guidance
risk assessment and, we think tapering its purchases but extending them beyond
the current time frame (end of the year).  

The current position of the BOE is that it will maintain its GBP435 bln
holdings of mostly government bonds until interest rate normalization was well
under way, which it identifies as nearer 2%.
  Assuming 25 bp rate
hikes, that is seven hikes of the bank rate, which is currently set at 25 bp.  

McCafferty does not speak for the central bank,
and his views are not consistently reflective of sentiment on the MPC.
Moreover, the power of expanding the central bank’s balance sheet seems to lie
more with the signaling impact that the actually
buying or holding for that matter.  This
suggests that the market would interpret any hint that the unwind could be
brought forward as a signal of a less
accommodative stance.  

Sterling’s two-day rally has retraced 61.8% of the decline since peaking
near $1.3030 on June 30. 
That retracement objective was
$1.2950.   Technical indicators are mixed.  For the better part
of  2 1/2 months, sterling has
stalled a little above $1.30.  The $1.3055 level corresponds to a 38.2%
retracement of sterling’s decline since the UK referendum.  The interest
rate differentials between the US and UK (both the ends of the coupon curve)
are trending in the sterling’s favor.  

The UK reports inflation figures next week and retail sales. 
While we suspect UK inflation is near a peak, as last year’s oil surge and
sterling’s sharp depreciation drops out of base effects, it may be a little
early to expect it in the data.  On the other hand, retail sales likely
contracted for the second consecutive week in June, which would also be the
fourth decline in the first six months of the year.  

Since the market began pricing in Macron’s likely victory in France in
mid-April, the euro has rallied 7.6% against sterling to reach almost GBP0.8950
  However, sterling
reversed and saw follow-through action
today.    A move below GBP0.8800 suggests
additional near-term losses.  The next immediate target would be near
GBP0.8750 and then GBP0.8700.  The ECB meets next week, and the market may be reluctant to part with its long euro
position ahead of it on the idea that the
ECB may again tweak its risk assessment.  


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