Bank of England Can Offer {{0|Pound Sterling}} Further Support Against Euro, Dollar: Bank of America
PoundSterlingLIVE – According to a new analysis from Bank of America (NYSE:), it is too early for the Bank of England to pivot its policy in an aggressive manner.
Analysts expect the to find support over the coming weeks as it becomes clear the Bank of England will be one of the last major central banks to cut rates.
Yet, today’s and guidance are still expected to see the Bank shift its stance, with one member of the Monetary Policy Committee potentially voting for a rate cut and only one voting for a rate hike.
Furthermore, inflation forecasts are expected to be lowered as inflation has fallen faster than the Bank’s November forecasts suggested, and energy prices are expected to act as a significant drag in April.
But Bank of America says investors should not take these as signs that an interest rate cut will come as soon as May, the date the market consensus currently sees as kick-off.
“The Bank of England meeting should mark the beginning of a slow pivot towards a cutting cycle that should start in August and proceed slowly,” says Ruben Segura-Cayuela.
Bank of America economists say the BoE is unlikely to find that “material progress had been made in returning inflation to the 2% target sustainably”, and hence, they think it is unlikely to pivot strongly.
Furthermore, it is expected that an August rate cut will make the UK the last of the major central banks to start cutting, and “it is likely to move more slowly, at least compared with the ECB,” says Segura-Cayuela.
This will have an impact on the Pound, explains Kamal Sharma, FX analyst at Bank of America, as “it’s all relative,” he explains.
“At a time where many central banks have been guiding markets towards the possibility of near-term rate cuts, the BoE has been steadfast in its view that rates will need to stay higher for longer and rates cuts will be later rather than sooner,” says Sharma.
2024 has seen markets pare aggressive expectations for Bank of England interest rate hikes, reflected in the rise in the Pound to Euro exchange rate back above the 1.17 level.
The Pound to Dollar exchange rate has meanwhile proven resilient, defending levels around 1.27 as Sterling resists the broader U.S. Dollar rebound.
Yet, market pricing still shows a May rate cut is anticipated, meaning the ‘pricing out’ of further rate cuts can extend and offer further support to the Pound.
“In terms of GBP reaction, with the market still pricing in the chance of early rate hikes, we think the risks are skewed asymmetrically. We doubt that the MPC will validate current market pricing so an unwind of front-end cuts should be constructive for the GBP outlook,” says Sharma.
An original version of this article can be viewed at Pound Sterling Live
