GBP/USD Options Market Anticipates 70 Pip Range on BoE Day

GBP: Option market prices 70 pip GBP/USD range on BoE day

The big day has finally arrived. The market prices 34bp of rate hikes from the Bank of England (BoE) today as the Bank battles second-round inflation in an increasingly febrile political environment. The FX options market prices a 70 pip range for GBP/USD event risk today - which feels a little too narrow.

As our UK economist, James Smith, discusses in his BoE preview, it looks too early for the BoE to push back against the very aggressive tightening expectations currently being built into to UK money market curves. These see the Bank Rate nearly 150bp higher at 6.00% early next year. In theory, a 25bp hike (our call) and no BoE pushback can see sterling stay relatively bid. However, it has been noticeable this week that sterling has not followed short-dated UK rates higher  - suggesting investors are looking through the hiking cycle to the pain ahead for the UK economy and asset markets.

On balance, we think EUR/GBP has made an important turn higher this week and can easily see it trading back to 0.88 over coming months. The softer dollar environment should keep GBP/USD bid and suggests demand emerges below 1.2700 should the BoE statement or minutes say anything less hawkish than the market expects.