The British Pound is under pressure as many anticipate the BoE to signal a rate cut in tomorrow's central bank meeting announcement.
The British Pound has been subdued since the beginning of the week, as market participants worry that the Bank of England (BoE) will adopt a dovish approach in its interest rate announcement tomorrow. GBP/USD slipped below the 1.2500 threshold during Wednesday's (May 8th) European trading session, while the EUR/GBP rally continued to breach 0.8600, marking its highest level in the last ten days.
Results from a Reuters survey indicate that all respondents — totaling 63 economists — expect the BoE to keep its interest rates unchanged in the upcoming policy meeting. The same survey reveals that most respondents believe the BoE will likely cut interest rates in the coming months, albeit with differing opinions on the timing.
The median forecast suggests that 48% of respondents — 30 out of 63 economists — expect the BoE to cut interest rates starting in the third quarter. 31 economists forecast June, while the remainder predicts November.
"(The BoE interest rate cut) will occur between June and August; we are slightly leaning towards August based on the fact that one of the key things the Central Bank is watching is service inflation," said James Smith, an economist at ING Financial Markets. "If service inflation is a bit stickier, I think that will tilt the balance slightly more towards August rather than June, but honestly, this is a tough call."
As the prospect of an imminent interest rate cut draws closer, the BoE is likely to adopt a dovish tone in tomorrow's meeting announcement. This speculation is weighing on the Pound against most major currencies.
"We think they will sharpen their communication, and we think one more member will vote for a rate cut (in the BoE meeting)," revealed Kirstine Kundby-Nielsen, FX analyst at Danske Bank, who predicts that two out of nine members of the BoE Monetary Policy Committee will vote for a rate cut. "We think the market reaction will push the euro-sterling higher and overall weaken the pound."
Current market data indicates that the majority of traders expect the BoE to cut interest rates twice in 2024, starting in August. Each cut is expected to be at least 25 basis points.
The market could react strongly if the BoE delivers a more dovish indication, for example, if the meeting outcome confirms an interest rate cut starting in June. Conversely, the market could drive a Sterling rebound if the BoE expresses an intention to maintain high-interest rates for a longer period.