Will the Bank of England help or hinder pound sterling?

Today’s Bank of England interest rate decision could help or hinder pound sterling’s future value. It is almost certain that the Bank will raise interest rates for the 14th consecutive time at today’s meeting. A pause in rates would cause shock to the market and likely trigger wide-scale sell-off of the pound.

Current expectations are for a 25-basis point hike. However, there is a chance that the Bank opt for 50-basis points. This would mean back-to-back 50 basis point hikes causing a 1% raise in interest rates in less than 2 months. Sterling would likely rise against its major counterparts in this event.

Currently, GBPEUR sits within range of the 11-month high. Cable (GBPUSD) has lost 3.5% vs the highs seen a couple of weeks ago. We could see cable drop further should the Bank opt for a 25-basis point hike.

Exchange rates will also be affected by the tone of the Banks commentary. UK inflation has reduced but is still elevated around 8% and significantly higher than the target level between 2-3%. Markets are expecting UK interest rates to peak around 6%.

If the Bank raise rates by 25-basis points that leaves the door open for two further hikes to bring rates to the terminal level. However, a suggestion that the bank is close to their terminal level could shift expectations lower and cause the pound to weaken.

Last week the Federal Reserve in the US and the European Central Bank both opted for a 25-basis point rise.

Based on forecast data collated by Lumon from 54 banks and financial institutions, sterling is trading above the 3-month average against the euro and dollar.

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