The pound advanced against the dollar (GBPUSD=X) on Thursday as traders awaited the Bank of England’s decision on UK interest rates.
Threadneedle Street is widely expected to raise rates by 50 basis points (bps), its sixth consecutive increase and the biggest rise since 1995.
But it is expected to be in a dovish fashion with big cautionary remarks about the future outlook. Focus will also be on policy guidance, inflation forecasts and details over quantitative tightening.
Sterling edged higher against the US greenback to $1.215, and moved in a narrower range in the morning, while it was also 0.14% up against the euro (GBPEUR=X) on the day.
“Inflation expectations are likely to move up for this year, but the BoE won’t want the market to think it’s going super-hawkish. If it does deliver a more hawkish tone, GBP can get a lift but the base case for a ‘dovish’ 50bps hike could see sterling sold on the fact,” Neil Wilson, chief market analyst at Markets.com, said.
“The BoE has been dripping rate hikes in a piecemeal fashion that has done nothing for inflation nor sterling because it’s been worried about the economic outlook (because, get this, of inflation!) — it requires a much more forceful message but we won’t get it today from Andrew Bailey, who remains out of his depth in terms of communicating policy.”
It comes as inflation reached 9.4% in the year to June, partly due to a 42% year-on-year increase in petrol prices, and an increase of almost 10% in food prices.
BoE governor Andrew Bailey is expected to unveil forecasts showing that inflation will still be significantly above 10% in 2023 as Britain also battles soaring energy bills thanks to the ongoing war in Ukraine.
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“Given the outlook for gas prices and the role sterling plays in monetary policy, the Bank may find it difficult to steer away from its previous message of acting forcefully. As ever, the devil will be in the detail,” Thanim Islama at Equals Money said.
Meanwhile, Michael Hewson of CMC Markets said: “With the pound already down 10% year to date against the US dollar, the bank needs to act in a much more dynamic fashion to keep imported inflation in check, especially with the potential for another 50 or 75bps from the Federal Reserve next month.
“In the last couple of weeks Bank of England governor Andrew Bailey said any decision to move by 50bps today was certainly on the table, but any decision to do so was by no means locked in.
“Unfortunately for Bailey his track record on guidance isn’t exactly reliable having led the markets up the garden path in November last year, only to bottle the decision and then be forced to act in December.”
Watch: How does inflation affect interest rates?
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