Dovish MPC to support recent GBP weakness

Sterling has been one of the poorest performing G10 currencies since the BoE 6 August Inflation Report. The currency has depreciated about 2% against the USD and 3.6% against the EUR with only the NZD and AUD weakening by more. The combination of a relatively dovish Inflation Report, where the MPC indicated a high degree of uncertainty regarding the economic outlook and appropriate timing of rate rises, and more recent concerns about Chinese growth has led to a substantial re-pricing of BoE rate hike expectations throughout August, says Barclays in a report to its client. At the beginning of the month, the UK interest rate market implied an 80% chance of a March 2016 BoE rate hike versus just 40% currently. 

This week's September MPC meeting and associated minutes should reveal an even more cautious stance given recent Chinese growth concerns and financial market volatility, supporting recent GBP depreciation. Indeed, Governor Carney noted at the recent Jackson Hole Economic Symposium that while direct exposure of the UK economy to China is "relatively modest", a further material slowing of growth in China "could impart further imported disinflationary pressures over the policy horizon." Despite recent currency depreciation, the overall macro-policy mix in the UK remains tight. GBP is about 6% overvalued on a real effective exchange rate basis and fiscal policy consistent with reducing the fiscal deficit by 2.3 percentage points of GDP over the next two years. 

"The MPC is assumed to remain uncomfortable with the persistent sterling strength. If the exchange rate does not continue to adjust lower the market may price even further delays to BoE tightening, added Barclays.