The BoE will stay on hold Thursday, with vote split likely unchanged. We like GBP and think
it’s cheap even if the BoE is more dovish in October than September. This dovish shift looks
priced with the first hike now seen in February 2017. Softening PMIs and only very tentative
signs of an inflation recovery are likely to endorse a ‘lower for longer’ narrative.
Base case: Unchanged vote, more dovish language and cognizance of slower growth. Not as dovish
as the market i.e. still could hike H1-16. Small GBP positive. Our short-term FV model suggests GBP is close to 5 figures undervalued (Figure 2).
Dovish surprise: Haldane votes for cut, discussion of CPI acceleration Q1 2016 disappears. GBP
Hawkish surprise: Leaving risks unchanged and seeing weakness driven by tighter supply side
would be bullish GBP. BoE could push back against flat pricing of rates. Buy vs. EUR and USD.