BoE Likely to Maintain 5% Interest Rate Amid Ongoing Inflationary Pressures

Impact on GBP: BoE adopts a cautious approach

The Bank of England (BoE) is set to announce its policy decision today, with consensus and market pricing suggesting no rate cut is expected as?inflation has not improved enough to justify further easing at this time.

The perception that the BoE is taking a more cautious approach compared to the Federal Reserve, while offering limited forward guidance, is seen as a factor in gilt underperformance and GBP strength. This is not expected to change following today’s meeting. Additionally, attention will be on the plans for quantitative tightening, with expectations that the pace of balance sheet reduction will remain unchanged at ￡100bn over the next year.

There is potential for GBP/USD to move higher this week due to the divergence between the Fed and the BoE, with a possible test of levels above $1.3300. GBP/EUR may increase above?€1.1900 after the BoE's announcement, though a sustained outperformance of the Pound against the Euro in the longer term is seen as less certain.

Data:

12.00:?BoE Asset Purchase Facility,?Interest Rate Decision &?Minutes

Impact on EUR: Poised for gains amid shifting rate differentials

The $1.1200 short-term target for EUR/USD remains supported by the current rate environment. Following the post-FOMC volatility, short-term rate dynamics suggest consolidation above $1.1100, with potential for further upside. This view is reinforced not only by the Fed's larger-than-anticipated rate cut but also by the increasingly vocal hawkish stance from the ECB, which is discouraging markets from anticipating another Eurozone rate cut in October.

The EUR:USD 2-year swap spread has narrowed to -0.85bp, a significant shift from -160bp in April and -100bp a month ago. If not for the Eurozone’s weaker growth outlook, rate differentials alone could have pushed the pair closer to $1.1300.

Today’s Eurozone calendar lacks significant market-moving data, but several ECB officials, including Panetta, Knot, and Schnabel, are scheduled to speak. Hawkish voices are likely to maintain market hesitation around pricing in further ECB easing, despite the Fed's dovish tone.

No Major Data

Impact on USD: Dollar appears vulnerable after oversized rate cut

The Fed's 50bp rate cut yesterday was more surprising to economists than markets, which had priced in a 65% chance of such a move. Along with this, the Dot Plot projections were significantly revised. The median Dot Plot now indicates an additional 50bp cut this year, 100bp next year, and 50bp in 2026, with a terminal rate of 3.0%.

In the FX market, the Dollar initially weakened, with currencies like the Yen, Norwegian Krone, and New Zealand Dollar rising around 1%, while the Canadian Dollar lagged behind other G10 currencies. However, by the end of Powell’s press conference, these movements had reversed. Powell's comments suggested that further 50bp steps may not be guaranteed, contributing to the Dollar's recovery.?

The Fed's decision has left the Dollar in a relatively softer position compared to other developed market currencies. Although Powell tried to downplay the dovish implications of the cut, it is challenging to ignore the perception that market expectations influenced the Fed's decision. With the USD OIS curve now pricing in 68bp of easing for the remaining meetings this year, a moderate slowdown in the jobs market could cement expectations for 75bp of easing.?

Data:

13.30:?Initial Jobless Claims (Sep 13)

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