Pound Sterling Continues to Slide vs Euro and Dollar Ahead of Thursday’s BoE Meeting

May 8, 2024 - Written by John Cameron

STORY LINK Pound Sterling Continues to Slide vs Euro and Dollar Ahead of Thursday’s BoE Meeting

The pound is the weakest G7 currency in May so far.

Meanwhile, the FTSE is showing relative strength and has been making new all-time highs.

This indicates the market is anticipating and positioning for a dovish BoE meeting.

The bank may signal a cut is likely in June, which could drop the pound even further.

Markets are relatively quiet again on Wednesday with no significant scheduled events or data releases to liven things up. EURUSD is flat ahead of the US open, as are US stock futures. European stocks are slightly higher with the FTSE outperforming and making new all-time highs.

The FTSE’s impressive recent performance has been accompanied by a weaker pound. Sterling exchange rates have slipped slowly lower and it is the weakest currency in the G7 so far in May. The combination of a higher stock market and softer currency suggest the market is positioning for a dovish outcome in Thursday’s BoE meeting. The question is, will the bank deliver?

BoE Preview

Central bank cuts are almost certainly coming this year. The ECB are likely first to move and are due to cut in June, while the Fed stayed dovish at their last meeting, boosting the odds of a cut in September. The BoE, on the other hand, are somewhere in-between the Fed and the ECB, and markets are expecting a first cut in August. That said, the bank have stayed relatively tight lipped on the subject and may want to leave the door open for a further delay should inflation bounce back like it did in the US. Comments from Huw Pill, Chief Economist and Executive Director for Monetary Analysis, warned inflation may rise again after the expected dip in the coming months (due primarily to lower energy bills).

Huw Pill’s comments were somewhat of an outlier and a surprise as they followed a number of dovish hints from Governor Bailey and Deputy Governor Ramsden.

“Bailey has stated clearly that he doesn’t think the current US inflation problem is shared in the UK, a message we expect to be hammered home in Thursday’s post-meeting press conference. And Deputy Governor Dave Ramsden – previously a hawk – said recently that the balance of risks on inflation is now tilted to the downside,” note ING.

These mixed messages should be cleared up on Thursday. Doves will be looking for a signal of a June cut. With inflation potentially dropping below the bank’s 2% target in the coming months, there would be little pushback if the BoE synced their cut with the ECB. However, they may be taking an unnecessary risk by doing so and they would have to signal it in this meeting before there is compelling evidence inflation is beaten. If they are again non-committal, we can assume they will want to wait until August or even later when the time is deemed perfect.

“Expect an optimistic air to Thursday’s meeting but we think the Bank will stop short of rewriting its forward guidance, which would be tantamount to endorsing a June rate cut at a time when the near-term direction of UK inflation is still uncertain,” continue ING.

The pound’s weakness in May seems to have been pricing in a dovish outcome and the expectation of a June cut. It would likely have further to fall if this were confirmed. On the other hand, if the BoE were to stay on the fence and hint at an August cut, the pound may make a slight recovery. EURGBP has broken above 0.86 but this may limit further gains and push the pair back towards 0.85 support.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Sterling Forecasts