The Bank of England (BoE) is anticipated to maintain the Bank Rate at 5.25% today, aligning with both consensus and current market expectations. The likelihood of a rate cut in either June or August is currently uncertain, thus any indication of a dovish stance increasing the chances of a June cut could potentially weaken the pound.
GBP/USD remains below the $1.25 mark, while GBP/EUR stays above €1.16 as traders anticipate the "Super Thursday" meeting, which includes the BoE Monetary Policy Report revealing updated economic projections. It is anticipated that the BoE will revise its medium-term inflation outlook downwards, considering the disinflationary trend resembling that of Europe more than the US. Additionally, the MPC vote split may lean towards a more dovish stance, possibly with another policymaker, such as Ramsden, aligning with Dhingra in voting for a rate cut. Such a scenario would elevate the likelihood of a June cut, making relative rates unfavorable for the pound's value. Speculative traders have been positioning for a weaker pound, evidenced by the increase in GBP short positions, the highest since January 2023.
Although GBP/USD overnight implied volatility remains relatively stable, EUR/GBP overnight implied volatility surged to 8.6%, marking the highest level in three months. Option skews indicate a preference for topside, implying sterling might face increased downward pressure against the euro in response to a dovish tilt from the BoE today.
