We expect the Bank of England (BoE) to announce a substantial easing package on Thursday, including a 25bp rate cut, GBP75bn of additional asset purchases and adjustments of its Funding for Lending Scheme. See Bank of England Preview: Substantial package of easing measures (1 August) for details.
Market expectations are already high: a 25bp rate cut is fully discounted and QE is also to some extent priced in.
EUR/GBP outlook:
We expect EUR/GBP to move higher on the announcement despite relatively high market expectations, as we expect the BoE to maintain a very dovish stance, which should help underpin market expectations of additional easing further down the road. We forecast EUR/GBP at 0.86 in 1M.
Over the medium term, we think that more GBP weakness is in store: we target 0.88 in 3M and 0.90 in 6M.
FX strategy:
While we remain bearish on GBP, we prefer to stay sidelined in the near term as most of the expected BoE easing package seems to be priced in.
We recommend that EUR- and DKK-based real money funds maintain a high hedge ratio on GBP exposure.
We recommend that EUR- and DKK-based corporates hedge GBP payables for the coming 12 months via participating in risk reversals (buy 1 x notional EUR/GBP put, sell ½ x notional EUR/GBP call). GBP receivables should be hedged via FX forwards.
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