LONDON: Sterling fell against the dollar and British government bond yields ticked up ahead of a Bank of England meeting at which policy makers are expected to acknowledge inflation is slowing, but be cautious about hinting rate cuts are imminent.
Also in the mix were cooling euro zone inflation, renewed jitters about US regional banks and the Federal Reserve meeting on Wednesday at which Chair Jerome Powell flatly stated a cut as early as March seemed unlikely, but conceded all US rate setters were looking to ease this year.
That left the dollar stronger across the board and the pound was down 0.3% at $1.2648.
The British currency was steady against the euro, at 85.29 pence per euro, not far from Monday’s 85.13 pence per euro, the pound’s strongest since August.
The Bank of England will announce its rate decision at 1200 GMT.
Markets think it is all but certain to keep rates unchanged at their highest in nearly 16 years, but policy makers are expected to acknowledge that inflation is slowing more than the Bank had previously forecast and remove some language from their statement which had previously said they could tighten monetary policy further.
Three of the nine members of the BoE’s Monetary Policy Committee voted in December for a further rise in rates, but this month economists polled by Reuters expect only one policymaker to vote for a rate rise - and a minority think another policymaker might vote to cut rates for the first time since March 2020.
Sterling slips versus dollar before BoE and Fed meetings
“They have to acknowledge reality (that inflation is slowing), but the more important component of today is how do (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 because of tightness in the labour market and higher wages and underlying measures of services inflation.
“If there’s going to be a market reaction today I think it’ll be more if Bailey pushes back on the idea that they are in a position to start cutting soon, that could give short term rates and Sterling a lift,” said Halpenny.
Current market pricing reflects roughly a two-thirds chance the BoE cuts rates by 25 basis points in May.
Two cuts by August are currently fully priced in. Britain’s two year gilt yield was last 5 bps higher at 4.28%, a slightly larger rise than the 3 bps for Germany’s Bund.
The 10 year gilt yield rose 2 bps to 3.82%