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25 Feb 2015
GBP/USD making advances on BoE / Fed outlook - Rabobank
FXStreet (Guatemala) - Jane Foley, Senior Currency Strategist at Rabobank explained that the BoE has predicted that UK CPI inflation could potentially turn negative in the spring before recovering as the impact of last year’s falls in the oil price begins to drop out of the year-on-year CPI calculations.
"Due to the temporary nature of the downward pressures on UK CPI, BoE Governor Carney has indicated that the Bank will “look through them”. After all, the drop in oil price is “unambiguously positive for the global economy”. In the minutes of the January MPC meeting, the Bank included an estimate that if the drop in oil from June last year was entirely supply driven it would have the impact of boosting world growth by almost 1% by the end of 2017."
"Although the US and UK inflation indices are behaving in similar ways, the most recent commentary from the BoE has clearly sounded a more hawkish tone that that of Yellen. This is likely a function of market positioning."
"At the start of this year many US investors were primed for a Fed rate cut as soon as June 2015. Yellen therefore has been tasked with gently conveying the message that patience may be necessary. By contrast at the start of this year UK money market rates were pushing out expectations for a UK rate hike into June 2016 and Carney has responded by signalling that the dovish outlook may have extended too far."
"The differential in US-UK rate expectations was a prime reason for the sharp fall in the value of cable between June 2014 and January 2015. Now that expectations of US rate hikes have moderated and the BoE has sent a signal that its next policy move is likely to be a hike cable is pulling back some ground."
"Due to the temporary nature of the downward pressures on UK CPI, BoE Governor Carney has indicated that the Bank will “look through them”. After all, the drop in oil price is “unambiguously positive for the global economy”. In the minutes of the January MPC meeting, the Bank included an estimate that if the drop in oil from June last year was entirely supply driven it would have the impact of boosting world growth by almost 1% by the end of 2017."
"Although the US and UK inflation indices are behaving in similar ways, the most recent commentary from the BoE has clearly sounded a more hawkish tone that that of Yellen. This is likely a function of market positioning."
"At the start of this year many US investors were primed for a Fed rate cut as soon as June 2015. Yellen therefore has been tasked with gently conveying the message that patience may be necessary. By contrast at the start of this year UK money market rates were pushing out expectations for a UK rate hike into June 2016 and Carney has responded by signalling that the dovish outlook may have extended too far."
"The differential in US-UK rate expectations was a prime reason for the sharp fall in the value of cable between June 2014 and January 2015. Now that expectations of US rate hikes have moderated and the BoE has sent a signal that its next policy move is likely to be a hike cable is pulling back some ground."