The British pound dipped against the U.S. dollar on Tuesday, with market participants adjusting their expectations ahead of the Bank of England’s (BoE) policy announcement scheduled for Thursday.
This anticipation has led to pricing in of two quarter-point rate cuts within the year.
A Reuters survey involving several economists suggests a consensus that the BoE will maintain the current interest rates in its imminent announcement.
However, analysts are forecasting that the central bank may hint at potential rate reductions as soon as June.
Traders now anticipate a total of 53 basis points in rate cuts for the year, a significant increase from previous expectations which fully accounted for just one rate cut following inflation data from March that indicated a slower than expected price decrease.
“We think they’re going to sharpen their communication and we think another member will vote for a rate cut,” stated Danske Bank FX analyst Kirstine Kundby-Nielsen.
She anticipates that two out of the nine-member Monetary Policy Committee will support a reduction in borrowing costs in this week’s vote.
Kundby-Nielsen also mentioned, “We think the market reaction will send euro-sterling higher and overall weaken the pound.”
Subsequently, the pound was noted to be down 0.2% at $1.2534 against the dollar and dropped by 0.1% to 85.86 pence per euro.
Despite this, the British currency remains one of the stronger performers among the major currencies this year, showing a modest 1.5% decline year-to-date against a robust dollar.
This compares more favorably than the euro’s 2.5% drop and the yen’s 8.5% fall.
Signs that inflation is aligning closer to targets, combined with comments from BoE Governor Andrew Bailey expressing ease with the current inflation trajectory, have prompted market adjustments for further easing expectations.
“We believe GBP is poised to weaken as it has been defying gravity for too long,” commented Paul Mackel, global head of FX research at HSBC.
In other economic news, British construction companies reported the fastest growth seen in over a year during April, despite a continuing decline in house building, a survey revealed on Tuesday.
“After two years of stagnation, the economic recovery is becoming more established and is broadening,” remarked Peter Arnold, EY UK chief economist.
He also suggested, “Though it’s still very early days, another solid increase in GDP in Q2 seems a feasible prospect.”
Economists await the official first quarter GDP data, due to be released on Friday, with a general expectation of a 0.4% growth following a 0.3% contraction in the last quarter of the previous year.