At the time of writing, UK rates markets are expecting the BoE to keep the bank rate unchanged at its March policy meeting and to ease a total of c.53bp by the end of 2025. The view is broadly consistent with our own view that foresees two additional BoE rate cuts in the coming months.
The policy outlook is driven by the combination of relatively sluggish economic recovery and still-sticky inflation that we and the BoE expect to prevail in the UK this year. GBP investors would further focus on any shifts in the MPC voting split that could point at potential dovish or hawkish pivots in the coming months. Ahead of the BoE meeting, GBP investors would also focus on the latest UK labour market data.
Turning to the FX market reaction, we note that the GBP has underperformed the EUR of late. While we recognise that EUR sentiment has significantly improved in recent weeks, we also note that following the recent rally in FX spot, EUR/GBP is starting to look quite overvalued according to our short-term fair value model. We therefore believe that signals from the MPC that it envisages only a very gradual and relatively shallow easing cycle from here could underscore the rate appeal of the GBP over the EUR and thus help push EUR/GBP lower once again.
