SNB increases its inflation forecasts for 2018

That was not surprising. The SNB did not change its monetary policy this morning. Rates will remain negative at -0.75% and the target range for the 3-month Libor is unchanged at between -1.25% and -0.25%.

Over the summer the Swiss franc weakened against the single currency. Yet, for the time being the CHF remains significantly overvalued even though current levels are the lowest levels in the last two years. The central bank declared in its press release that it will remain active in the FX market.

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On top of that markets have now strong expectations towards the ECB regarding the future of the monetary policy. There are definitely strong room for further EURCHF downside risks within the short-term. Indeed, the never-ending Greek issue will soon be back on the table and the Catalonian referendum is weighing on the European cohesion. As a result, we believe that actual EURCHF levels are temporary and are fully reflecting the actual weakness in the Eurozone.

Regarding the Swiss economy, it is still largely resilient despite strong CHF. Recently growth printed lower than expectations for Q2. Annualized inflation is at 0.5% for August and the SNB has revised upwards its forecasts. Unemployment rate remains stable and the SNB is optimistic “The situation on the labour market is gradually improving”.

Cautious needed ahead of BoE rate decision

It has been on a bumpy road since the beginning of the week as investors reacted to various events ranging from the latest progress made on the Brexit bill, accelerating inflation pressure to stalling wage growth. The pound sterling hit 1.3329 on Wednesday up more than 1% since Friday’s close. Nevertheless, the cable quickly reversed gains to return at around 1.32 as traders scale back their bullish GBP bet ahead of today BoE meeting.

The Bank of England is facing a difficult situation where it is facing an acceleration of inflation pressures together with the prospect of a slowdown of the economy, which could be significant should the negotiations with the European Union be harsh. Against the backdrop a potential significant slowdown, the BoE will have no choice but to tolerate temporarily an overshooting of its inflation target in order to avoid suffocating the economy.

As the monetary institution won’t update its inflation and growth forecast this time (one has to wait the November meeting), the question is rather how many MPs will switch sides and join the hawks. GBP/USD is trading sideways ahead of the interest rate decision. Given the sharp appreciation of the pound over the last few days, we think that the risk is skewed to the downside with a possible retracement towards the $1.30 level.

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