Sterling Underperformance: Anticipation Builds Ahead of BoE Announcement

GBP: Underperforming into the BoE

The pound has been the worst-performing G10 currency in the past 30 days, and Bank of England members’ dovish comments are surely to blame. We are not surprised to see investors staying broadly defensive in FX ahead of tomorrow’s CPI figures and Thursday’s BoE announcement. The data has not pointed clearly in the dovish direction, but BoE communication has (compared to previous expectations), so even evidence of lingering price pressures tomorrow does not guarantee a hike on Thursday.

We discuss why the BoE might keep rates on hold and what would be the impact on sterling in this note. Our base case remains a rate hike, although the upside for sterling would entirely depend on whether the BoE will convince markets they can do more (a similar situation to last week’s ECB meeting) since the Sonia curve prices in 38bp of tightening in total, even if they attach only an 80% implied probability of a hike on Thursday.