HSBC: The pound is going to crash whatever the Bank of England does today
At Thursday lunchtime, the Bank of England's Monetary Policy Committee will announce decisions made at its first post-EU referendum meeting - probably one of the most important gatherings in the MPC's history.
The market expectation is that the BoE will cut interest rates by 25 basis points to a new record low of 0.25%. Up until today, rates have stood unchanged at 0.5% since 2009, a record 87 months of inaction from the central bank.
However, whatever the BOE decides to do at 12:00 p.m. BST (7:00 a.m. ET) the pound is set to tank, bringing to an end a strong rally in recent days, according to research from HSBC.
The pound crashed after Britons voted to leave the EU, losing more than 10% of its value in a couple of trading sessions, and dropping down to the lowest level since 1985. It has since rallied a little, thanks largely to the increased political stability brought about by the appointment of former home secretary Theresa May as prime minister.
Around 9:30 a.m. BST (4:30 a.m. ET) sterling is up by 0.7% against the dollar to trade at $1.3239, just off a one-week high reached on Wednesday. Those gains are likely to be completely erased whatever Mark Carney and his colleagues decide to do, HSBC strategists led by Daragh Maher.
Here is HSBC's chart:
And here is the bank's analysis of why such moves will happen:
"In gauging the likely scale of the reaction, we can look to the impact of governor Carney's initial suggestion of a summer easing made on 30 June. Here the interest rate market reacted by pricing in an additional 8bp of easing by year end 2016. GBP moved lower by 1.0% against the USD at the same time. This helps provide some rough guide as to the likely scale of impact on GBP as monetary policy expectations are recalibrated in light of the decision, and are reflected in our suggestions in diagram 1."
Essentially, the bank argues that the only scenario where sterling might rally is if the BOE leaves rate unchanged, and even then it is unlikely, saying that if there is no cut "the market might doubt governor Carney's observation that the BoE is 'rapidly putting a clear plan into action.' GBP would be un-nerved, not reassured. It may also be interpreted that Carney is not carrying or speaking for the committee."
The best case scenario for sterling will be the expected 25bps cut, largely because that is what the markets are expecting, so it is largely priced in - 77% according to HSBC:
"There would be none of the market anxiety associated with inaction as set out above, but nor would the market be forced to revisit its expectations for the scale and pace of any future easing."
At the other end of the spectrum, if the BOE were to go big and cut rates to zero, as well as reintroducing quantitative easing, that could push sterling lower by more than 5%, back below $1.30.
"A drop in the policy rate by going 'all in' to the zero bound alongside a fresh expansion of the QE programme would be a dovish shock to a market not even fully priced for a 25bp easing. It would point to a 'shock and awe' type approach for policy with the BoE," HSBC argues.