Excel Currencies Blog

Both the BoE interest rate decision and following meeting to create market volatility..

Last week, the Pound took full advantage of the ECB's dovish comments on future interest rate hikes. The question this week, is whether the BoE will follow suit?

Traders have priced in a 75% chance of a 25bp rate hike this Thursday, but it remains unclear whether this has already been priced into GBP's current value. Last time out the central bank surprised many by adopting a 50bp jump, currently a 25% chance of happening. 

The latest inflation story shows both the core and general inflation number falling faster than expected. Because of the lag on much of the data such as energy and food, we should see inflation continue to fall easily without a BoE rate intervention. However, we are not quite there yet for that to happen and we are not at the expected 6% that many economists forecast the UK to hit either.

So 25bp seems the obvious vote and a softer stance on future rate hikes does too in our opinion. We therefore may well see an initial GBP increase on Thursday, before a drop off during the meeting (but don't hold us to that!). Either way, it's a risk event and one that will determine the trajectory of the Pound for the weeks ahead.


EUR
It's a case of 1-step forward, 2-steps back for the Euro currently which remains hugely out of favour on the market. This was heightened last week after soft ECB comments on future interest rate hikes. The single currency takes a back-seat this week with nothing major of note being released. The majority of times this has taken place this year has seen an increase in value, so let's see what happens this time round..


USD
It has been a strong 2-weeks for the Dollar, rebounding from a tough Q2 period across the board. The Fed is leading the way in calling interest rates right and the US economy is performing well (both actually bad news for the $). The majors have been gaining on USD in recent times because of a more aggressive interest rate path. However, this is only months away from changing and so expect to see the Dollar possibly dominate the remainder of the year.