ING analysis on Tuesday pointed out that the upcoming Bank of England (BoE) meeting is a major event for the pound (GBP), with GBP/EUR (EUR) expected to trade in a range of 0.8550-0.8600. Analysts at the firm said the pound could face upside risks if the Bank of England’s communications lean towards a dovish stance.
Current market sentiment has been tempered by recent comments from Bank of England chief economist Huw Pill, which reduced expectations for a major shift in the bank’s cautious policy stance. James Smith, ING’s UK economist, said ING’s core view is that the Bank of England’s announcement of an interest rate cut at Thursday’s meeting may be premature and that the adjustment is more likely to occur in August rather than June.
Although the market is pricing in lower interest rates, with a 30% chance of a rate cut in June, ING analysts believe that the pound will not need to rise significantly if the Bank of England maintains its current language. They also expect that due to Australia’s ongoing inflation and the country’s positive output gap, investors may begin to explore relative value trades against the pound, particularly short positions against the Australian dollar (AUD).
All in all, ING is cautious on the outlook for sterling ahead of the Bank of England policy meeting. The firm expects the currency to trade in a tight range against the euro, with the possibility of gains if the Bank of England unexpectedly takes a dovish stance. Analysts also highlighted the potential for relative value trades involving the pound against the backdrop of global inflation trends and economic indicators.
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