Sterling should weaken if FPC hikes capital buffers, Unicredit says

Sterling should weaken if the Financial Policy Committee decides to increase lenders' counter cyclical capital buffers, analysts at Unicredit Research said.

Contrary to what one might think, such a decision would not foreshadow tighter policy from rate-setters at the Bank of England, rather the opposite.

Higher capital requirements would weigh on the economy, although they would only come into effect 12 months after an announcement, they said.

Indeed, there may be a 'substitute' effect between them and increases in Bank Rate.

Nevertheless, a 'knee-jerk' reaction in the value of the pound following an announcement was possible in their opinion.

"That said, following the surprisingly hawkish comments by MPC member Haldane last week, we would not rule out a knee-jerk reaction by sterling. If this happens and EUR-GBP drops towards 0.86, we would see this as a buying opportunity."