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The weaker than expected inflation in February had briefly caused doubts on the market about an imminent Bank of England (BoE) rate hike. But the doubts were already cast aside by improved wage data yesterday. What matters now is that the BoE will confirm market expectations today. The central bankers would have every reason to come across more optimistically. So far the economy seems robust and inflation remains above target.
Only the Brexit negotiations entail the most significant risk for the future development of the British economy. Following the recent round of negotiations, there was a more optimistic tone, but we remain skeptical. Anything to provide sustainable support for Sterling seems unlikely in view of the continued Brexit uncertainty.
The short GBPCHF trade is underwater this week following the outperformance of Swiss franc, even as sterling was relatively range-bound. The Brexit process remained in focus as the EC published its draft negotiating guidelines for the UK’s future relationship with the EU.
The mutual recognition that PM May proposed in the recent past was precluded in entirety with the draft guidelines offering a FTA covering all sectors with zero tariffs on goods, a Canada style relationship.
However, the negotiations on the future trade agreement will be far from smooth given the vast gulf between the EC’s and UK’s initial positions. In addition, recent comments from Tusk suggest that until the impasse on the Irish 'hard' border is resolved then Brexit negotiations are likely to stall with agreement on the transition deal. These developments keep us biased towards GBP underperformance, consequently, we stay modestly short.
Sold GBPCHF at 1.2971 Feb. 9th. Marked at 1.45%. Long a 1Y vol swap in EURGBP. Opened at 8.85% November 21. Marked at -1.2%.
Currency Strength Index: FxWirePro's hourly EUR spot index has shown -81 (which is bearish), while hourly GBP spot index was at 75 (bullish), CHF at -16 (mildly bearish) while articulating at 09:40 GMT. For more details on the index, please refer below weblink:
http://www.fxwirepro.com/currencyindex.
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