BoE and Pound Sterling Outlook: Odds of an August Cut Increase to 60%

June 21, 2024 - Written by David Woodsmith

STORY LINK BoE and Pound Sterling Outlook: Odds of an August Cut Increase to 60%

The BoE kept rates on hold as expected. While there was no commitment to a cut in August, the tone was dovish and markets are now 60% pricing it in. Elsewhere, the SNB surprised markets by making a second cut in a row.

Thursday’s session brought two major central bank meetings from the Bank of England and the Swiss National Bank. Both could be classed as dovish, but it was the SNB who made a major dovish policy change by cutting rates to 1.25%. This follows on from a cut in their last meeting and surprised markets as a hold was widely expected. The SNB admitted this was not a cut in response to lower inflation; rather, there was a need to weaken the Swiss Franc as its safe haven status in the wake of the EU elections (and the upcoming French election) was causing too much strength. In this sense, the SNB succeeded as the Swiss France dropped around –0.9% versus the US dollar and –0.65% against the euro. However, inflation may continue to stay too high despite some positive comments from the SNB’s Chairman Jordan who said underlying inflation pressure has decreased.

The meeting from the BoE caused less volatility as it largely went as expected. No changes were made to interest rates and a dovish but cautious tone prevailed. While they stopped short of signalling a cut, the hints suggest one is getting close. Sterling is slightly lower on the day and –0.1% against the euro.

BoE Pave the Way for a Cut

There was no change in policy in Thursday’s meeting and the voting pattern stayed the same with a 7-2 majority in favour of keeping rates on hold. However, the accompanying statement shifted more dovish and could be interpreted as laying the groundwork for cuts. Due to the general election, this isn’t likely to be in July, but August now looks probable. Indeed, the odds jumped from 40% to 60% and the more hints we get in the coming weeks, the higher this will get.

Of course, Wednesday’s CPI reading will have helped the bank’s dovish tone. With inflation now at the Bank’s 2% inflation target, there won’t be too much opposition to cutting sooner rather than later. Hawks may point to sticky services inflation and wage growth but there will never be a perfect time when everything lines up just right. In fact, the Bank addressed the prickly subject of services inflation which showed an uncomfortable reading of 5.7% in Wednesday’s release. As ING note:

“Rather revealingly, the statement puts this down to volatility related to annual price hikes towards the start of the financial year. And that suggests the Bank isn’t drawing too many conclusions about the underlying trend from the most recent data.”

In other words, the Bank is not looking for reasons to keep rates on hold and is seeing data through a dovish lens. Even so, members are obviously not confident enough to commit to a pre-defined path. Forward guidance remained unchanged and vague, and kept the phrase rates need to stay restrictive for an "extended period." This helped keep the pound stable after the meeting and there was only very minor weakness against the euro. The BoE may have learned from the ECB who somewhat backed themselves into a corner by committing to a cut in June several months in advance. They could not change course even though data introduced doubts. The BoE will have the benefit of seeing the July inflation print and the general election before having to make a more concrete decision on whether or not to cut ion August. This could benefit EURGBP, especially since the euro will be weighed down by political uncertainty for several more weeks. GBPUSD, on the other hand, may not fare as well as markets are warming to the idea of an August move and could price it in further.

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