The consensus among economists has recently shifted in favour of a Bank of England rate cut at the upcoming policy meeting on Thursday. This has been ING’s longstanding view. It is a close call, but they expect a 6-3 vote split in favour of a 25bp rate cut, ING’s FX analyst Francesco Pesole notes.
GBP/USD to contract in short term
“Markets have remained more hawkish than consensus, having kept the pricing for the August meeting within 14bp for the past month, and are currently expecting 13bp. We think there is some mispricing also on the year-end tenor, which currently sees 52bp of cuts against our call for 75bp. If the BoE does cut this week, then expectations may shift for two extra moves.”
“We had already seen reasons for a contraction in GBP/USD and a rally in EUR/GBP based on inconsistencies with rate differentials. We think that some US Dollar (USD) weakness can limit Cable’s downside, and favour EUR/GBP to display weakness in the pound this week. We still believe that a move to 0.850 would be entirely warranted in the near term.”
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