British Pound Today: Potential Moves and Analyst Views on 'Super Thursday'

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- Sterling tipped to rise if Bank hints at further interest rates in coming months

- Much will depend on economic forecast changes contained in inflation report

- Analysts don't appear confident of sustained Sterling recovery being triggered by  rate hike

- GBP/USD quoted at 1.3114 at time of writing, Pound-to-Euro exchange rate at 1.1225.

The Bank of England is widely expected by the market to raise UK interest rates to 0.75% at mid-day on Thursday, August 02.

This would be only the second increase since the 2008 financial crisis, despite that consumer price inflation has fallen much faster this year than it or almost any economist had forecast.

For Sterling, much will depend on the tone struck regarding the economy while the forecasts held in the Inflation Report will be instructive (see the May Inflation Report for previous forecasts here).

In short, markets will want to know when the next interest rate rise will take place; if the timing for the move is brought forward Sterling will likely rally, if it is pushed back, Sterling will likely fall.

It is against a backdrop of falling inflation, weak wage growth and a tepid economic performance that the Bank of England will raise interest rates, if it raises them at all.

And for these reasons, few analysts see the BoE sounding a tone that is "hawkish" enough for it to pick Sterling up off of the floor Thursday. 

Analysts give thier views below on whether they think the BoE will go ahead by pulling the trigger on a rate hike and what that might mean for Pound Sterling during the weeks and months ahead.

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Analyst Views:

Viraj Patel, FX Strategist, ING Group

"A Pound under the political cosh is unlikely to find much love from a dovish 25bps BoE rate hike at the August 'Super Thursday' meeting."

"While we see the MPC delivering a 25bps rate hike at the ‘Super Thursday’ August BoE meeting, we think the potential for at least one, if not two dissenters (Cunliffe and Ramsden) – as well as cautious rhetoric by Governor Carney in the post-meeting press conference – is unlikely to engender much hawkish spirit in either UK rates or the pound this week, not least as both markets remain dominated by the risk of a no-deal Brexit."

"The Bank of England not hiking this week would be the equivalent of pulling a rug from under GBP’s feet – with GBP/USD falling to 1.2800/50 and EUR/GBP rallying to 0.90-0.91."

Morten Helt, senior analyst at Dankse Bank:

"The GBP has been one of the weakest performing currencies in the G10 space over the past month, as political uncertainty related to Brexit has outweighed the growing prospect of a rate hike from the Bank of England in August."

"We expect EUR/GBP to trade slightly lower going into the Bank of England meeting. However, given that the market almost fully discounts a rate hike, we expect any rally in the GBP to prove short-lived." (More on this view here)

Stephen Gallo, head of European FX strategy at BMO Capital Markets

"We don’t think there is much the MPC can do about the gap between the GBP and economic fundamentals except ensure that it doesn’t cause that divergence to widen further. We therefore expect the MPC to 1) deliver a 0.25% rate hike this week and 2) sound reasonably upbeat on the economy. On balance, the recent de-escalation of US/EU trade tensions and the lull in near-term Brexit risks provide the window of opportunity for the MPC to hike."

"Given the aforementioned Brexit risk discount, the single biggest issue facing the GBP this week is that the BoE probably couldn’t cause a material steepening of the SONIA curve or a major GBP rally even if it wanted to. There is simply too much political uncertainty ahead."

"Broadly similar QIR forecasts (vs. May), an upbeat message about the near-term prospects for the economy and reassurances about the resilience of the UK’s financial system in the event of a Brexit “cliff edge” should be neutral-to-slightly GBP negative for FX investors.

"This is a simple “buy the rumor, sell the fact” dynamic. On the other hand, a no-hike scenario or an overtly dovish message from the QIR & the MPC could have an outsized, downward impact on the GBP."

Andreas Steno Larsen, FX strategist, Nordea Markets 

"While the market is convinced that Bank of England will hike firmly on Thursday, we think either a very dovish hike or no hike at all are more likely outcomes of the meeting. We continue to dislike GBP as a consequence."

"The unemployment rate remains glued to the latest NAIRU-assessment of around 4.25%, while wage growth has decelerated compared to latest inflation report from May (from 2.9% to 2.7%). Core inflation has surprised on the downside compared to the May inflation report, while headline has developed more or less in line with the May projections from BoE."

"We think the MPC will vote to keep rates unchanged by a 5-4 margin, but the view hinges on a dovish revision of the projections by the BoE staff. The bottom-line is that we favour a short GBP position in to the meeting from a risk/reward perspective. Even a dovish hike could end up as a GBP negative event, given the current pricing of BoE."

"If the MPC set aside credibility considerations, there are no reasons to hike in the UK. Core inflation will drop towards 1% over the next quarters on our models."

Ulrich Leuchtmann, head of G10 FX strategy, Commerzbank

"Suddenly, analysts are afraid of a “hard Brexit”. Even a rate step by the Bank of England on Thursday, which is widely expected, will not do much to calm these fears. Slowly but surely, all FX analysts are realising that the time for a constructive Brexit solution is getting short."

"The divergence between the BoE’s and the ECB’s monetary policies was believed to be much more important. If the focus on the Brexit issue gains ground, the BoE will slowly be backed into an uncomfortable corner. After all, if tight monetary policies no longer succeed in propping up the exchange rate, the promise Carney gave after the Brexit referendum (namely, that he would prevent a GBP slide by interest-rate policy, if necessary) will obviously turn out to be nothing but a lot of hot air."

Miles Eakers, chief market analyst, Centtrip

"I think the Bank of England will raise interest rates on Thursday, 2 August. What is more important is how many Monetary Policy Committee members vote for a rise and if there will be an indication of further rate increases."

"A hawkish hike will boost the Pound but only for the short term. That said, Mark Carney may catch market participants off-guard again and not increase rates, which will weaken the Pound substantially and could fall as low as its yearly nadir of $1.2956 or even below. Even if the BoE does hike, the Brexit negotiations are still under way, keeping the Pound under pressure for the foreseeable future."

James Rossiter at TD Securities:

"Our base case suggests modest, short-term upside risks for GBP but range trading is likely to reassert itself after a large knee-jerk move. Ongoing Brexit concerns remain an offset to any benefit from higher rates," says James Rossiter, a strategist with TD Securities in London.

Under such a scenario the Pound-to-Euro exchange rate is seen heading to 1.13, the Pound-to-Dollar exchange rate is seen edging up to 1.32.

Kathy Lien at BK Asset Management:
 
25bp Hike + Hawkish Carney: If the BoE raises interest rates by 25bp, upgrades their inflation forecasts and focuses more on price pressures than Brexit, GBP/USD which has been in a tight 1.3082-1.3200 range will break to the upside. In this scenario, we see the pair clearing 1.32 easily on its way to 1.3250.
 
25bp Hike + Neutral Bias: If the BoE opts for a dovish hike, which entails downplaying the need for future tightening, GBP/USD may rally initially but give up its gains quickly. In this scenario, we see sterling dropping below 1.3080 but finding support near 1.30.  
 
No Hike: Keeping rates unchanged regardless of their forward guidance would be the biggest surprise. This would take GBP/USD to 1.30 quickly and open the door to a move down to 1.28.

Our Take

The consensus is clearly very glum on Sterling's prospects.

What we do know is that when sentiment appears to be too heavily pitted in one direction, the prospect of a contrarian surprise becomes heightened. In this case, any positive surprises will likely have a greater impact on Sterling than a negative surprise.

But, any gains are likely to prove limited in the face of the enduring negative sentiment surrounding Brexit negotiations.

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Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here