The Bank of England has been pretty pessimistic for quite some time in its rate statements. However, reading the details has meant that signs of optimism keep sitting under the surface. The last central bank meeting was no different with both growth and inflation revised higher again. The BoE see GDP staying at 7.25% this year from 7.25% previously, but project a rise in GDP growth in 2022 to 6.00% from 5.75%.

Inflation to add pressure to the BoE

At the last meeting, the BoE said that they see Inflation spiking this year to 4.00% but dropping down to 2.5% in 2022. So, the BoE is firmly in the ‘inflation is transitory’ camp. The last inflation reading out this week saw the core y/y reading move higher to 3.1% from 2.9% expected and the core m/m reading moving higher to 0.7% from 0.4%. The headline was below the Bank of England’s projected 4% for this year at 3.2%. So, in accordance with the Bank of England’s own projections, they will still not worry about inflation, at least on paper.

However, the BoE is getting ready for lift-off

Balance sheets will be paid back when rates are at 0.5%. The BoE has also said it would consider selling gilts when rates reach 1%. At any rate, rates should not reach 0.5% until 2023 and this makes balance sheet reduction some way off. However, the bottom line is the path to normalisation has been made fractionally easier and that is GBP supportive over the medium term.

The bottom line

Buying the GBP against the CHF and the JPY makes sense medium term. At some point, the optimism should breakthrough into the rate statement. Both the SNB and the BoJ should keep rates very low and that should make them ideal partners with the GBP. Check out two possible entries for the GBPJPY on the chart.

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