The Bank of England (BoE) will announce its latest policy decision on Thursday. If dovish signals accompany an expected interest rate cut, Sterling could stumble.
At the time of writing, the pound is hovering above recent lows and struggling to push higher. GBP/USD is about one cent above the 12-week low struck last week, while GBP/EUR is less than a cent higher than the 32-month low hit at the end of July.
What is the BoE expected to do?
Markets widely expect the BoE to deliver a 25-basis-point rate cut on Thursday, lowering interest rates to 4%.
With a 25bps cut almost fully priced in, the focus will be on the voting split among policymakers and the bank’s forecasts and forward guidance, with markets trying to gauge when the next rate cut could come.
How could this impact GBP?
If a dovish split emerges, with some officials voting for a larger 50bps rate cut, Sterling could face headwinds as markets price in the possibility of a faster pace of policy loosening. Conversely, if a rate cut is agreed with just a narrow majority, GBP exchange rates could fare better.
Any upward revisions to the bank’s inflation forecasts could also potentially lessen the sting for Sterling.
However, the pound ultimately looks poised to fall as the BoE cuts rates against a deteriorating economic backdrop.
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