Did market overreact to BoE, were moves justified? - Nomura

Analysts at Nomura explained that the BoE’s communications were in line with their expectations, but the market reaction was in the wrong way and moved much more than what would make sense to them. 

Key Quotes:

"It was again “something for everyone” as the Inflation Report is largely qualitative in terms of how to interpret the BoE’s thinking. No mention of further hikes in “coming months” has led to a flatter short-end curve and that has pulled GBP down, with the removal of the line saying policy could be tightened more than the market expects. 

But let’s flip that on its head, if either of those statements had remained, that would have been the clear “hawkish hike” scenario, so we are firmly in the neutral not dovish result. Is this is a game changer for the recent lift in the pound prior to today’s reaction? We would argue it is not. The BoE has delivered in line with our view and we are now simply held hostage to incoming data and coming Brexit negotiations, both of which we are more optimistic on than the market. 

While we may disagree with the market’s knee-jerk reaction we cannot ignore it; prudent portfolio management is in order. The selloff in GBP has taken our combined long position via EUR and AUD back to the level roughly where we started with the EUR leg up $54k, but the AUD side down $44k, with a net GBP profit of +$13k. We therefore will keep the $10mn in our EUR/GBP short position, but exit our $5mn in GBP/AUD, reducing our overall long GBP delta, but are still of the view the medium-term trade has further upside.

We can envisage short-term EUR/GBP heading back to 0.90, but ultimately the BoE will react if there is a continued FX selloff in the medium term and today’s decision should put a bottom in any excess GBP weakness. If anything, today’s market reaction raises the probability of more hikes if it is sustained and we should remember that when discussing the longer-term outlook."