Last week, central banks in Japan, Canada, and the Eurozone opted to maintain their policy rates, marking a subdued start to the monetary policy year. The focus now shifts to the Federal Reserve and the Bank of England, scheduled for Wednesday and Thursday, respectively. Although no immediate policy changes are anticipated, investors will closely analyse comments and press conferences to discern the sentiment of policymakers. These seemingly uneventful meetings this week will serve as crucial steppingstones leading up to the forthcoming rate decisions.

Globally, expectations for policy easing have diminished, with the most notable reduction in anticipated cuts observed for the Bank of England (BoE). Projections indicate a 30-40 basis points lower reduction by the BoE compared to the Federal Reserve (Fed) and the European Central Bank (ECB) this year. GBP has been anchored around $1.27 against the USD for six consecutive weeks, displaying no signs of a breakout. In contrast, GBP/EUR has surpassed €1.17 for the first time since September, marking its fifth consecutive weekly appreciation. GBP’s strength is attributed to stronger-than-expected Consumer Price Index (CPI) and Purchasing Managers' Index (PMI) figures, overshadowing weaker metrics such as consumer confidence and retail sales. The ongoing trade of GBP/USD around the $1.27 level suggests a lack of directional movement. GBP/EUR's ascent above €1.17 is supported by weak Eurozone data and a somewhat dovish stance from the ECB. However, the current risk is tilted towards the downside, as the Bank of England is not anticipated to align with the hawkish expectations on Thursday.

Policy makers are expected to maintain the benchmark rate at 5.25%, aligning with the consensus forecast. Nevertheless, the possibility of a downward revision in the central bank's inflation forecast poses a risk to GBP. Despite a gradual decline in wage growth, it remains sufficiently high to justify keeping rates steady at least through the first quarter. Both the services and manufacturing PMIs expanded last month, indicating that the British economy is holding up somewhat better than initially anticipated.