It all started at 9:30am local time, when the UK reported a stronger than expected Q3 GDP print of 0.4% Q/Q, above the Exp. 0.3%, and 1.5% Y/Y, also above the Exp. 1.4%. Heading into the report there was much anticipation, due to chatter that a miss would drastically diminish the chance for a 2017 rate hike from the BOE. And while the initial response to the beat was rather muted, cable started gathering momentum after the report, with cable rising as high as 1.326, after nearly sliding below 1.31 earlier in the session.
And while the strong data will likely reassure those at the BoE in favour of hiking, it was not strong enough to convince those who are still on the fence. Still, given the split, most sellside desks believe that a hike is now more or less guaranteed, especially with Brexit noise dying down for the time being.
And to assure traders that cable may have more to run here, is Brown Brothers on why the BOE is almost certain to raise rates next:
The case for a hike is clear. Growth in Q3 was a little better than the MPC expected, inflation is above target, and the unemployment rate is slightly below what the MPC sees as sustainable. The market (OIS), according to Bloomberg calculations, has an 87% chance of a hike discounted. The case against a hike is that inflation appears poised to peak shortly, the economy is softening, and real wages are falling. This may already be squeezing households, where an increase in the base rate is quickly passed through to households.
That said, a hike would likely be a one-off. Taking back the post-referendum rate cut is not the same thing as a sustained normalization cycle, such as the one the Federal Reserve is engaged. We would not be surprised to see sterling, bought on speculation of a hike, to be sold on the fact.
For today, sterling is bid, though it is trading within yesterday’s ranges. A move above $1.3230-$13240 is needed to lift the technical tone. The 20-day moving average is found a bit lower at $1.3220, and sterling has not traded above this average for three weeks.