BoE 'in a quandary' over rate cuts amid inflation and job market challenges
Last week was an unusually quiet one in the UK that was almost entirely devoid of any major macroeconomic or policy news.
Sterling instead largely traded at the mercy of broader dollar trends, which triggered a move in GBP/USD to its lowest level since mid-May, before the pair rebounded back towards the 1.33 handle following Friday’s disastrous NFP report.
Concerns surrounding Britain’s fragile fiscal outlook remain prominent, but with the pound left somewhat oversold by the recent move, there is arguably room for a mild pick-up.
Focus this week shifts to Thursday’s Bank of England announcement. Rising inflation and a near total capitulation of the jobs market places the MPC in a quandary.
While we expect the majority to vote in favour of a cut, we would not be shocked to see a three-way split, whereby most vote for a 25bp rate reduction, a couple vote for a jumbo cut and one or two opt in favour of no change.
Aside from the voting pattern, it will be interesting to see whether the BoE maintains its “gradual and careful” rate guidance. We suspect that it will, although any change here would almost certainly be greeted by a bout of GBP weakness.
Author
Matthew Ryan, CFA
Ebury
Matthew is Global Head of Market Strategy at FX specialist Ebury, where he has been part of the strategy team since 2014. He provides fundamental FX analysis for a wide range of G10 and emerging market currencies.
