Market brief
Bank of England swing voters take the stage as traders price a November hike
Megan Greene, Huw Pill, Andrew Bailey and Clare Lombardelli are all due to speak on Thursday, with money markets pricing 21 basis points of tightening for next month.
Key points
- Catherine Mann speaks first, with Megan Greene, Huw Pill, Andrew Bailey and Clare Lombardelli all due on Thursday; Bailey and Lombardelli are the two neutral MPC members seen as the likeliest swing votes for November.
- Money markets price 21 basis points of tightening for next month, 36bp by year-end and 89bp by June.
- ING's FX strategists argue the broader Sonia curve is far too hawkishly priced, expect the risk of a November move has risen materially, and see EUR/GBP retesting its mid-July lows near 0.846.
The Bank of England members who could decide whether rates rise in November take the spotlight this week, in a run of appearances that centres on Thursday. Catherine Mann, who voted for a hike at both the July and September meetings, is due to speak first. Megan Greene and Huw Pill, who also backed increases, are due on Thursday, the same day as Andrew Bailey and Clare Lombardelli — the two Monetary Policy Committee members who have stayed neutral and whom ING's FX strategists regard as the most likely swing votes ahead of the November meeting.
Those speaker dates matter because of what the money market has already assumed. Traders price 21 basis points of tightening for next month, 36bp by year-end and 89bp by June. A basis point is one-hundredth of a percentage point, so 21bp is a little less than a standard quarter-point increase, while 89bp by June amounts to more than three such moves. That pricing lives on the Sonia curve — Sonia, the Sterling Overnight Index Average, is the benchmark that anchors sterling money markets — which is where banks and funds express their expectations for the path of Bank Rate. Hawkish repricing there is normally a tailwind for the pound, because it means traders anticipate a higher policy rate being sustained for longer.
ING's FX strategists read that curve differently. They argue the broader Sonia curve looks far too hawkishly priced — that is, it embeds more tightening than they expect the committee to deliver — even as they concede the risk of a November move has risen materially. They also caution that converting a hawkish mispricing in sterling rates into a rally for the euro against the pound is difficult, and expect EUR/GBP to retest its mid-July lows around 0.846, with a move to 0.840 possible before clear support appears.
Two forces underpin that call, in the strategists' account. Elevated oil prices should keep downward pressure on further hawkish repricing in the Sonia curve, capping how much additional support sterling's rate expectations can generate, while the euro faces significant domestic headwinds of its own that pull EUR/GBP from the other side. Both mechanisms point the same way for the cross. If oil prices fall back and the euro's domestic drag eases, the case for a move through 0.846 and on toward 0.840 weakens; the forecast rests on hawkish sterling pricing stalling rather than on a fresh round of Bank of England increases.
