PoundSterlingLIVE - The British Pound was offered against the Euro and Dollar as investors reduced exposure ahead of Thursday's Bank of England decision where anything other than a 50 basis point interest rate hike could result in declines according to some currency market professionals we follow.
The Pound to Euro exchange rate has retreated to 1.1624 while the Pound to Dollar fell by over half a per cent on Tuesday to quote at 1.2753 by midweek in a market that remains highly vigilant to shifts in central bank expectations.
Money market pricing shows investors expect a ~34 basis point hike from the Bank, which is effectively a split opinion on either a 25bp or 50bp move from the Bank.
"With expectations split down the middle between a 25bp and a 50bp move. That pretty much guarantees a reaction," says Kit Juckes, an analyst at Société Générale.
Juckes says the Pound is vulnerable if the Bank of England doesn't hike by 50bp. "Given where expectations are that leaves GBP vulnerable this week. 25bp from the Bank, and solid US data, could easily drag GBP/USD back below 1.25," he warns.
The case for a 25bp hike with a warning there could yet be more to come, "would seem sensible," says Juckes, particularly given with inflation and house prices are falling.
"The Bank of England will likely shift gears down to a 25bp rate hike at its MPC meeting on Thursday. The cooler June inflation data has eased the pressure on policymakers, even though wage growth remains a concern. They may well use the 'data dependent' card going forward, like other major central banks," says Jamie Dutta, Market Analyst at Vantage.
Kristian Brauten-Smith, an FX trader at Goldman Sachs (NYSE:GS) says the Pound would likely retreat on anything but a 50bp hike as the Bank of England would risk squandering the credibility it has been fighting to restore.
"Taking a step back to reflect on the June BoE meeting, and for the first time in almost 18 months, the Bank managed to regain an element of credibility, reacting to the shockingly high inflation read for May with a surprise 50bp hike," the trader says.
The FX trading desk at Goldman Sachs is "of the belief that a continuation along this path and delivery of another 50bp is the correct angle for August, and that this is by far the most supportive outcome for Sterling."
Brauten-Smith explains the Pound has a tendency to suffer on BoE meetings despite the cumulative delivery of hikes over the past 12 months being the greatest in G10.
"Bailey can correct this whilst re-building the Bank's credibility by delivering 50bp in August, all with the appearance of a more cohesive response assuming Tenreyro's replacement Green translates into a vote with the majority," he says.
A 50bp hike can help the Pound to Dollar exchange rate regain a footing above 1.30 and support Pound Sterling more generally, as this relative front loading comes at a time when other central banks have seemingly completed their final hikes.
Last week the Federal Reserve and European Central Bank said they were not committing to raising interest rates again in September as they wanted to see the nature of the next set of economic data.
These moves potentially opened the door for a more cautious approach for the Bank of England which might feel enough has already been done by way of interest rate hikes.
This would be welcomed by businesses and mortgage holders, but for the Pound this could result in weakness.
"A 25bp delivery risks a near-term outcome of lower GBP," says Brauten-Smith, "but we believe this will be short-lived."
The Goldman Sachs trader looks for dips in the Pound-Dollar exchange rate to be limited to 75-90 with a 35-50 pip decline in the Pound to Euro exchange rate possible.
"We would rather fade both, but will likely take our time before engaging in our full position to such an outcome," says Brauten-Smith.
An original version of this article can be viewed at Pound Sterling Live
