BOE in Focus as Economists Split Over June Cut

The BOE is expected to keep interest rates unchanged at the upcoming meeting, with investors looking out for clues on whether any MPC members shift rhetoric towards rate cuts.

The End Coming Into View

UK inflation appears to be falling closer to the Bank's target rate, raising the possibility of a rate cut in June along with the ECB. Even Governor Andrew Bailey noted that market expectations align with the Bank's outlook. This would leave the Fed with a higher policy rate than its European counterparts, weighing on cable.

While the UK's CPI is evidently slowing, it is falling at a slowing pace as it reaches the 2% target. Similarly to other economies, which has led markets to delay rate cut expectations, reflecting increased uncertainty over the path of interest rates in the UK. Currently, economists are evenly split as to whether the first cut will occur in June or later in the third quarter, with 48% calling for a June rate cut.

Mounting Pressure

The case for easing policy gained traction a few weeks ago after Deputy Governor Dave Ramsden commented that inflation risks were coming into line with expectations. Given that the BOE would unlikely cut rates unexpectedly, this implies a need to telegraph the potential June rate cut in some form at the upcoming meeting. This would mean the bank would include a substantial easing bias in the accompanying statement, which could weigh on the pound, even after the BOE adopted a notably dovish stance last time.

As usual, the vote split will also be a key focus. At the previous meeting, the consensus to hold rates unchanged stood at 8-1, with Swati Dhingra, who consistently votes for cuts, dissenting. Investors will watch closely to see if anyone joins her dissenting view and, if so, how many members. This could provide insight into how imminent policy easing may be. Repeating the previous vote pattern could be interpreted as a sign that rate cuts will be postponed until the third quarter, providing some support to the pound. Current market expectations price in around an 88% chance of a rate cut by August, implying a total of two cuts by the end of the year. This is slightly less dovish than economists' forecasts, which predict 75 basis points of cuts by the end of the year.

Cable Near Double Bottom

Cable appears to be approaching support at 1.2465, potentially forming a double bottom in the short to medium term that could lead to a head-and-shoulders (H&S) pattern, with cable rising to 1.2530 on its way to 1.2570. Breaking higher, however, would invalidate such expectations. Conversely, if the GBPUSD pair breaks below the 1.2465 floor, it could experience further declines to 1.2450, with 1.2422 also at risk of being put to the test.

Source: SpreadEx GBPUSD

Key Takeaways

The BOE is expected to keep interest rates unchanged at its upcoming meeting, but investors will watch closely for any signs that policymakers are shifting towards June rate cuts as UK inflation is slowing towards target. This would leave the Fed with a higher rate than Europe, weighing on cable, but with inflation declining at a slowing pace, economists are split over between June or later in the third quarter. As pressure mounts, an increasingly easing rhetoric at the upcoming meeting could weigh on the pound even if the Bank maintains its recent, typical dovish stance.