Mitsubishi UFG Notes Sterling's Response to Bank of England Rate Cut

Sterling extends losses after the Bank of England cut interest rates by 25 basis points to 4.5%. The decision was widely expected. However, two members preferred a 50 basis-point reduction, which analysts hadn't anticipated. The BOE said it judges there has been sufficient progress in disinflation and that a "gradual and careful approach" to further rate cuts is appropriate. However, any evidence of long-lasting weakness in demand relative to supply in the economy could push down on inflation pressures and warrant even less restrictive rates. GBP/USD falls to 1.2365 after the decision, from 1.2425 beforehand. EUR/GBP rises to 0.8378, from 0.8341 previously. (renae.dyer@wsj.com)

One wild card for this year is what happens in Ukraine, said ING.

Wednesday the foreign exchange market took note of the further rise in Ukraine's hard currency bonds. Ukraine's international bonds rallied some two points in price terms, or 3%-4% price returns on the day, amid optimism that negotiations could bring a potential peace deal closer, wrote the bank in a note.

Reports that the United States will unveil a peace plan at next week's Munich security conference, in addition to signs that both countries' leaders are softening their stance towards potential talks, are positive triggers, stated ING. Last year's restructured bonds reached their highest price since issue, while Ukraine's gross domestic product warrants reached their highest price since January 2022, after steady gains since mid-2024.

Developments here will be watched next week and could offer a little support to , pointed out the bank.

The question is whether Friday's U.S. jobs numbers (LFS) need to drive the correction briefly back up to the 1.0530/70 area. ING cannot rule that out but doubt that any gains above 1.05 hold for long. The bank is still happy to look for a move back to 1.02 later this quarter, with 1.00 the likely trajectory in Q2 when broader U.S. tariffs are brought in.

1.0370-10450 should be the extent of the range on Thursday. ING doubts eurozone retail sales for December or European Central Bank speakers — Boris Vujic and Joachim Nagel — will be a market mover on Thursday.

The Bank Of England's trade-weighted sterling (GBP) index has rallied 1.7% since the middle of January. The recovery from the gilt-triggered January sell-off has undoubtedly been helped by the rally in U.S. Treasuries, added ING.

Additionally, the recent focus on tariffs has been a negative, with the United Kingdom less exposed and the U.K. perhaps even being granted a tariff exemption from the Trump Administration — if this week's comments are to be believed.

However, the external environment may sour if UST yields rise again, which is the bank's view. The brief reprieve in the tariff noise should allow investors to refocus on the U.K.'s fiscal and monetary mix. Fiscal will be a story for March, but on Thursday the monetary angle reappears with the BoE meeting.

ING expects an 8-1 vote to cut rates and a downward revision to growth forecasts to be a mild sterling negative. Much more negative would be a 9-0 vote, should arch-hawk Catherine Mann vote for a rate cut.

The bank continues to favor topping out this quarter in the 1.25/26 area and sees a strong case for it to be trading close to 1.19/20 later this year.

ING expects a resumption of the rate-cutting cycle by the Czech central bank (CNB) on Thursday and a 25bps cut to 3.75% in line with expectations and CNB's previous communication. The central bank will also unveil a new forecast which should see some dovish revisions but the governor's tone will be hawkish in the bank's view.

At the same time, we will also see Poland's central bank (NBP) press conference following Wednesday's decision to leave rates unchanged. ING also predicts a hawkish tone from the Polish press conference.

In the case of Poland's zloty (PLN), the bank prefers to be on the stronger side despite the current record-strong levels, due to the NBP's hawkishness and widening of the rate differential.

On the other hand, the Czech Republic's koruna (CZK) is more "complicated," according to ING. The bank has been bearish since the last inflation print, which has produced mixed results.

However, for Thursday, ING believes the soft inflation number on Thursday will bring a higher — yet this move may reverse after the CNB presser. Overall, however, not much can be expected from except higher volatility.

Sterling has been rebounding ahead of Thursday's Bank of England policy meeting after the heavy sell-off in January, said Mitsubishi UFG.

The BoE is scheduled to release its policy statement at 7 a.m. ET on Thursday.

After hitting a high of 0.8474 on Jan. 20, has fallen back towards levels in place at the start of this year — closer to the 0.8300 level, wrote the bank in a note to clients. Similarly, cable has climbed back up to the 1.2500 level after hitting a low of 1.2100 on Jan. 13.

Sterling-specific selling intensified last month when gilt yields hit fresh highs fuelling concerns over the health of the public finances in the United Kingdom, pointed out MUFG. Those concerns have since subsided as gilt yields have fallen alongside United States yields since the middle of last month.

The 10-year and 30-year gilt yields have since both fallen sharply by around 50bps, stated the bank. It still leaves yields in the U.K. higher than in other major economies which helps to keep sterling attractive as a carry currency especially with volatility easing back again after last month's sharp sell-off.

It was one of the main reasons why sterling was one of the strongest-performing G10 currencies last year, added MUFG.

The BoE's cautious approach to cutting rates has been an important reason why yields have remained at higher levels in the U.K. MUFG expects the BoE to deliver another 25bps rate cut on Thursday lowering the policy rate to 4.50%.

However, the policy rate spread over the European Central Bank will still be "substantial" at 1.75%. The case for further BoE rate cuts has been supported by the sharp slowdown in the U.K. economy in the second half of last year when growth ground to a halt, noted the bank.

MUFG expects the BoE to revise lower its forecast for gross domestic prodcut growth this year from 1.5% set back in November. There has also been more evidence of softening labor market conditions which should give the BoE more confidence that wage growth will slow going forward and create more room to make the policy rate less restrictive.

Core and services inflation fell sharply in December but it was likely exaggerated by the airfares component related to the timing of data collection. So MUFG doesn't expect the BoE to overemphasize the positive December consumer price index report.

In these circumstances, the bank sees the BoE sticking to its "gradual approach to removing monetary policy restraint" which has been consistent with a rate cut every quarter since the easing cycle started in August. MUFG predicts the BoE will deliver 100bps of easing this year.

While it will diminish the sterling's carry attractiveness, the bank doesn't think the BoE's update Thursday will be sufficient to trigger a bigger sterling sell-off unless there is a significant dovish surprise indicating a faster pace of easing.

Sterling could fall modestly if the Bank of England votes 8-1 to cut interest rates and downgrades its economic growth forecasts, ING analyst Chris Turner says in a note. A 9-0 vote in favor of a cut would be much more negative for sterling, he says. The BOE announces its decision at 1200 GMT and is widely expected to cut rates by 25 basis points. The brief reprieve in the "tariff noise" surrounding President Trump's policies should allow investors to focus on the U.K.'s fiscal and monetary mix, Turner says. GBP/USD falls 0.5% to 1.2446. EUR/GBP rises 0.1% to 0.8328. (renae.dyer@wsj.com)

Sterling falls as investors exercise caution ahead of the Bank of England's interest-rate decision at 1200 GMT. The market is pricing in a 94% chance of the BOE cutting rates by 25 basis points, according to LSEG. This marks the first decision since the U.K. government bond selloff last month. "Indeed, at the height of the pound's slump, there had been speculation about whether the BOE would cut at all at this meeting," Deutsche Bank analysts say in a note. However, the latest inflation data were lower than expected and this supported market bets for another cut. Deutsche Bank expects a 8-1 vote in favor of a cut. GBP/USD falls 0.2% to 1.2476. EUR/GBP rises 0.1% to 0.8325. (renae.dyer@wsj.com)

Sterling rises to a four-week high against the dollar, which weakens following the suspension of U.S. tariffs on Mexico and Canada, Monex Europe forex analyst Nick Rees says. "Sterling's recent drift higher looks like a predominantly-dollar driven move," he says. That is demonstrated by the fact sterling is only marginally higher versus the euro. However, the prospect of more gradual Bank of England interest-rate cuts relative to the European Central Bank suggest further sterling strength against the euro. Solid underlying growth, a relative lack of political dysfunction and insulation from U.S. tariffs compared to the eurozone also provide "good reason to be constructive." EUR/GBP falls 0.1% to 0.8310. GBP/USD rises 0.4% to a high of 1.2551.(renae.dyer@wsj.com)