Sterling falls against dollar, government bond yields rise ahead of BoE meeting -February 1, 2024 at 10:09 am

Sterling falls against dollar, government bond yields rise ahead of BoE meeting -February 1, 2024 at 10:09 am
Sterling falls against dollar, government bond yields rise ahead of BoE meeting -February 1, 2024 at 10:09 am
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The British pound fell against the dollar and British government bond yields ticked higher ahead of a Bank of England meeting, where policymakers are expected to acknowledge that inflation is slowing but will be cautious about hinting at interest rate cuts are imminent.

Also cooling inflation in the eurozone, renewed concerns about US regional banks and Wednesday’s Federal Reserve meeting, where Chairman Jerome Powell stated bluntly that a rate cut seemed unlikely as early as March, but conceded that all US rate makers would expect this year wanting to relax were part of the mix.

That made the dollar stronger across the board, with the pound trading 0.3% lower at $1.2648.

The British currency was stable against the euro at 85.29 pence per euro, not far from Monday’s 85.13 pence per euro, the strongest pound since August.

The Bank of England will announce its interest rate decision at 1200 GMT. Markets think it is almost certain that interest rates will remain unchanged at their highest level in almost 16 years, but policymakers are expected to acknowledge that inflation is slowing more than the Bank previously forecast and to make some language out of their will drop a statement that had previously said they could tighten monetary policy further.

Three of the nine members of the BoE’s Monetary Policy Committee voted in favor of a further rate hike in December, but this month economists polled by Reuters expect only one policymaker will vote for a rate hike – and a minority thinks another policymaker will vote for an interest rate cut for the first time since March 2020.

“They need to recognize the reality (that inflation is slowing), but the most important thing today is how (Governor Andrew) Bailey and the MPC interpret this new reality,” said Derek Halpenny, head of research global markets EMA at MUFG.

He expects them to remain cautious due to the tight labor market and higher wages and underlying measures of services inflation.

“If there is a reaction from the market today I think it will be more of Bailey coming back to the idea that they are in a position to start cutting quickly, that could boost short rates and Sterling, Halpenny said.

Current market prices indicate roughly a two-thirds chance that the BoE will cut rates by 25 basis points in May. Two interest rate cuts in August are currently fully priced in.

The UK two-year gilt yield was last 5 bps higher at 4.28%, a slightly bigger increase than the 3 bps for the German Bund.

The yield on 10-year gilt rose 2 bps to 3.82%.

The article is in Dutch

Tags: Sterling falls dollar government bond yields rise ahead BoE meeting February

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