Above: File image of Governor of the Bank of England Andrew Bailey. Image: IMF Photo/Cory Hancock. Licensing: CC 2.0.
The Bank of England will cut interest rates by at least 25 basis points again today, which won't come as much of a surprise to foreign exchange markets.
However, guidance about further rate cuts and a wild-card 50 basis point cut are the variables to watch as they could inject some energy into the Pound.
This is a back-of-the-envelope approach for the Pound-to-Euro exchange rate, as this pair will likely be a 'purer' play on the rate decision as the Dollar remains far more closely aligned to global sentiment and U.S. trade war developments.
Base case expectation: The Bank cuts interest rates by 25 basis points, and signals a follow-up cut in June. This would trigger a fall in GBP/EUR by approximately 0.25%.
A June cut means the Bank is considering quickening the delivery of cuts to support a stalling economy.
The Bank will get away with the move thanks to the cover provided by lower oil and gas prices, as well as GDP downgrades in their Monetary Policy Report.
The Trump trade wars will be the other source of cover.
We don’t see Sterling weakness persisting as such an adjustment in expectations is not significant - in fact, this is an idea the market has had time to adjust to. GBP/EUR could recover in the coming days.
Scenario 2: The Bank cuts by 25 basis points but signals a desire to maintain the status quo, i.e. a rate cut per quarter.
Currency reaction: a rise in GBP/EUR by approximately 0.25%. GBP/EUR would be left free to gradually recover to 1.19 in the coming days and weeks.
Despite the economic slowdown, falling oil prices and tariffs, the Bank simply can't ignore that inflation continues to rise, led by stubborn wage increases and services sector inflation. Accelerating the pace at which it cuts would risk the Bank's credibility.
Scenario 3: Bank cuts by 50 basis points, which would be a big surprise. They would justify it by calling it an insurance cut against Trump’s tariffs. This would result in a knee-jerk selloff by maybe 1% in GBP/EUR.
This could cause some further weakness in the days to come. However, we think GBP/EUR could recover if that ‘double cut’ means another rate cut is cancelled down the line i.e. it doesn’t necessarily mean an additional cut has been ‘priced in’, rather it is bringing forward a cut.
We reported midweek that Bank of England watchers have picked up that an unusual number of Monetary Policy Committee members are being wheeled out to give speeches in the aftermath of the decision.
"May be doing 2+2 = 5 here on the BoE, but feels significant that we have Bailey & Pill both speaking on Friday...then on Monday you've got Lombardelli, Greene, Mann & Taylor... for an MPC that never speaks much to have six speeches in two days seems notable," says Michael Brown, Senior Research Strategist at Pepperstone.
Typically, the lineup of speakers would be spread out over the coming weeks. If the Bank were to cut by 50 basis points, then it would need to deliver a strong message and narrative for the move.
This is because the cut would come in an environment of rising inflation that is taking the Bank ever further away from its 2.0% target.
A 50bp move would therefore put its credibility at risk and require some serious 'spin' from policymakers to sell the decision.