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Pound Sterling tends to fall against the Euro on Bank of England days shows analysis. And today is such a day.
The Bank of England will likely keep interest rates unchanged but signal it will cut interest rates at a future date, with money markets showing an expectation for the next cut to come in November.
Risks to the Pound will come in the composition of the votes for another rate cut, the tone of the guidance and Bank of England Governor Andrew Bailey's post-decision interviews. Recall, there is no press conference, but Bailey has in recent times given interviews in the hours that follow the decision.
Alvise Marino, Strategist at UBS, says he sees an increase in dovish risks around the decision as a potential catalyst for a tactical GBP pullback.
"If this were to be realised, we would look to fade EURGBP strength to 0.85, the top of our projected range for the remainder of 2024, targeting 0.83," says Marino.
This implies a potential recovery in EUR/GBP to 0.85 in the wake of the decision (Pound-Euro rate reference: 1.1765). The UBS year-end target is 0.83 (1.2050), which suggests near-term weakness won't derail the broader Pound Sterling rally.
Strategists at Danske Bank see a similar pattern playing out and say to expect the market reaction to be rather muted upon announcement.
"On balance, we tilt towards a dovish twist which does suggest some slight EUR/GBP topside following the release of the statement, as has been the case the past meetings," says Danske Bank.
Above: "EUR/GBP tends to move higher on BoE" - Danske Bank.
That said, currency strategists at the Scandinavian lender say they still expect "EUR/GBP to continue its recent move lower driven by UK economic outperformance, BoE lagging peers in an easing cycle for the time being and tight credit spreads."
With the Fed having cut by 50bp last night, the UK now offers the second-most attractive interest rates in the G10, and this should continue to hoover up global investor capital.
Analyst are expecting a 7-2 vote split in favour of rates to remain unchanged at 5.0%, with Ramsden and Dhingra voting for a cut.
The Pound will soften if more members opt to vote for a cut, as this would suggest members of the Monetary Policy Committee are leaning towards an accelerated pace of cuts in the future.
Currently, markets see just one more cut in 2024, but there remain risks that this could rise as investors consider whether the Bank could ape the Federal Reserve and deliver 50bp cuts.
However, given the robust economy and stubborn inflationary pressures, this is unlikely for now. So, while near-term downside risks lurk for Sterling, it could be some time before the broader constructive setup deteriorates.
Ahead of the inflation release, the market saw the odds of a cut on Thursday rise as high as 35%, with traders apparently thinking a 50bp cut at the Federal Reserve on Wednesday would open the door to an accelerated pace of cuts at the Bank.
However, odds of a cut on Thursday fell back to negligible levels after UK inflation rose in August as expected, which is not quite what the Bank of England would want to see when cutting interest rates.
Falling odds of a rate cut boosted the Pound, confirming that interest rate expectations remain front and centre for the currency.
However, the global backdrop is also of high importance for the currency, and a rally in equity markets will prove supportive.
Investors welcomed the 50 basis point interest rate cut from the Federal Reserve and equity bulls will hope the conditions are now in place for steady gains into year-end.
If this is the case, the Pound can enjoy additional tailwinds.