BoE to hike for sure, but by 25bps or 50bps?

Pound could fall against Euro, Dollar on 25bp hike.

The Pound could fall against both the Euro and Dollar should the Bank of England elect to hike the UK bank rate by just 25bp at today's monetary policy meeting.?"Our economists expect another 50bps hike from the Bank of England," say UK economists at Lloyds Bank in a brief to clients yesterday.?"Their base case is an 8-1 majority, with the dovish Swati Dhingra the continuing dissenter. They do acknowledge risks are strongly tilted towards a stepdown to 25bps, given mixed data since the June meeting; markets are leaning towards this, currently pricing in an implied hike of +32bps (Barclays Research)"?The Pound has recently retreated from highs against the Euro and Dollar as investors reassess their bets on today's key risk event for the British currency: the August Bank of England rate decision.?In the medium-term outlook, strategists at Rabobank take the broad view that anticipates both the Pound and the Euro to lose some ground against the Dollar in the coming months.

Euro lifted slightly by US downgrade.

The Euro appears to be slightly supported after Fitch Ratings downgraded the United States’ long-term foreign currency issuer default rating to AA+ from AAA. Still, monetary policy and growth differentials suggest the single currency is unlikely to benefit much from yesterday’s early lift, at least in the near term.?Both central banks, the US Federal Reserve, and the European Central Bank are in wait-and-watch mode with regard to further tightening, leaving very little monetary policy advantage from a relative perspective. From an absolute perspective, higher US rates clearly stand out. However, growth differentials appear to be in favour of the US, arguing for a softer EUR/USD.?

Dollar rally continues on risk-off sentiment and rising yields.

The Dollar continues to strengthen today, bolstered by prevailing risk-off sentiment that has carried over from US to Asian markets. The surge in benchmark 10-year yields is providing additional support to the greenback, as even Euro has finally conceded a near-term support level against Dollar, further affirming the underlying momentum.?Meanwhile, the foreign exchange markets elsewhere are mixed inside yesterday’s range. Sterling remains relatively indecisive as investors keenly await BoE rate decision. Elements of surprise, including the size of the interest rate hike, voting dynamics, and new economic projections, contribute to the uncertainty. Reactions in Sterling-European crosses will be pivotal, as these could dictate the momentum of the Pound elsewhere.