What does a Brexit transition deal mean for the Bank of England and for cable?

Author: Adam Button | Category: News

May hike?

The big news today is that the European Union said it has agreed to a transition deal with the UK that will maintain the status quo through 2020.

Cable is up 135 pips to 1.4074 on the news but that could be just the start. The economy and the Bank of England have been begging for some sign of progress and stability in negotiations.

The British Chamber of Commerce is just out with a positive note, saying this transition deal is sufficient for most businesses to plan ahead for investment and hiring.

At this point it's clear that the Irish border issues aren't going to scuttled a deal.

The next BOE meeting is this Thursday but a hike is unlikely. The OIS market is pricing in just a 15% chance and that's generous. What will be key is how they tee-up the May 10 meeting. Carney is now more likely to deliver a hawkish hint and a hike in May is probable.

Market pricing is for a 62% chance of a hike to 0.75%. This week, that's likely to make a big move and the pound along with it.

This is a genuine fundamental tailwind. Though it's been expected for some time, the positive tone is going to continue to boost the pound.

Technically, the rise above the late-Feb high points to more good times ahead. I expect it won't be long before fresh highs for the year -- baring any surprises on the US dollar side of the equation.

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