Will the Bank of England’s decision strengthen or weaken the pound?

Will the Bank of England’s decision strengthen or weaken the pound?

The outcome of today’s Bank of England interest rate decision will strengthen or weaken the pound moving forward. Sterling exchange rates took a big hit yesterday following an unexpected drop in inflation from 6.8% to 6.7%.

In the lead up to yesterday, many commentators and economists were expecting inflation to rise with predictions set at 7.1%. Even chancellor Jeremy Hunt warned of another uptick in price rises.

The Bank of England have raised interest rates at the last 15 meetings in attempt to bring UK inflation under control which peaked over 11% in 2022. However, recent drops in inflation show the interest rate rises are beginning to have their effect.

At the start of the week, the probability of an interest rate rise today was around 80%. Markets are now suggesting anywhere between 50-60% meaning a rise or fall may not be fully priced in to current rates. There could be significant volatility this afternoon depending on the tone of the BoE.

GBPEUR is trading within range of the 6-week low which is opportune for euro sellers. Cable (GBPUSD) is trading within range of the 4-month low which is well below many forecasts. Several banks including Citi, Standard Chartered and NAB are calling the pairing much higher.

A pause in rate hikes and a dovish tone regarding future policy could cause further trouble for cable rates. Please reach out to us below if you wish to be kept up to date with developments or call on +44 (0) 204 506 5672 and ask for Richard Nugent.

Other key events this week

This morning the Swiss National Bank unexpectedly left interest rates unchanged at 1.75%. GBPCHF has spiked following the decision.

Tomorrow morning, we will see the release of UK retail sales along with services & manufacturing PMI data from the UK, Eurozone, and US.

Retail sales is expected to decline by -1.2%. A sharper decline following a dovish BoE could spell trouble for sterling. The pound would find support with a positive reading.

PMI (Purchasing Managers Index) measures the output of the manufacturing and services sectors. A reading above 50 indicates an expansion. A reading below 50 indicates a contraction. Negative PMI data could cause volatility for all currencies involved.

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