Date: 15 Sep 2017

The Bank of England Monetary Policy Committee (BOE MPC) may have voted 7-2 on Thursday to hold rates unchanged at 0.25 per cent but the tone of the accompanying statement crystallized the event risk for GBP bears that the meeting might prove to be a hawkish hold. Whether the pound can hold onto gains (GBPUSD, EURGBP) remains to be seen but on the day the outcome was unnerving for those had been expecting sterling to slip back.

Arguably, with a structural short GBP position surely only partly unwound and markets now pricing in a UK rate hike, possibly as early as November, the bar for sterling bears has arguably been raised. But perhaps there’s another issue which might give sterling bears heart. As BOE Governor Mark Carney mentioned at his Mansion House speech back in June “the UK is running a historically large current account deficit” and “the UK relies on the kindness of strangers at a time when risks to trade, investment, and financial fragmentation have increased.”

There is an argument that European Central Bank (ECB) monetary policy, both with its negative key policy interest rate and the effect of its asset purchase programme on euro zone government bond yields, has pushed money that might normally be invested in euro zone paper into the United Kingdom in pursuit of a higher nominal yield. ECB policy may have helped the UK finance its current account deficit. As the ECB begins to withdraw monetary accommodation, a process that should begin next month if the ECB opts to unveil a plan to taper the scale of its asset purchases, the markets may start to wonder whether it will be quite so easy for the UK to keep funding its current account deficit. Traders will have their own views but perhaps it’s no coincidence that the BOE has been hypothesising that the UK yield curve should be a little steeper than it has been. A steeper UK yield curve, offering higher yields, could (and indeed may be needed) as an offset to the effects of slightly less accommodative ECB monetary policy.

Written by Neal Kimberley, External Currency Analyst.