By Matthew Boyle
It has been a rough ride for the Pound in recent months and things are about to heat up even more.
Having dropped to near 2-year lows against the Euro last week saw it recover around a cent following the European Central Bank’s decision to hold Euro interest rates at 2%.
While the ECB held rates, markets are pricing at least an 80% probability the Bank of England will cut interest rates when they meet tomorrow down by 25bp, to 4%.
Lower interest rates spell bad news for exchange rates as when interest rates are lower, foreign investors may begin to look elsewhere for higher returns.
Whilst this 80% probability is largely priced into the market before tomorrow’s result (like betting on sports event) it suggests buyers have a smaller chance of making a marginal gain in exchange rates versus sellers, who face a smaller chance of the rate being held for potentially bigger gains.
The bigger question though and what markets will be looking for tomorrow is any indication that the Bank of England plan to cut rates again before the end of the year.
The meeting minutes and monetary policy committee vote therefore after the rate decision on this occasion could have a huge impact on exchange rates.
Given that the ECB are all but guaranteed to hold Euro interest rates until December, hints the BoE may cut rates again later this year could spell further disaster for the Pound.
With bets heavily on a 25bp cut, a 50bp cut is also not out of the question. Should that occur expect an extremely volatile market against all currency bought with the Pound.
Whilst GBP sits close to a two-year low against the single currency, it currently sits close to a three-year high against the dollar. Undoubtedly Trump’s tariffs have weakened the dollar significantly with the Euro now seemingly stealing the top spot as a safe-haven currency.
Given the currently weak dollar, don’t be surprised to see a less extreme reaction against GBP rates than the strong Euro against the following tomorrow’s result.
With very little data of note for the reminder of the week and with so much at stake, expect movement in exchange rates.
Unquestionably tomorrow’s BoE rate decision could set the path for GBP exchange rates in the coming months and perhaps for the rest of the year.
Should you have an upcoming transfer, call us at A Place in the Sun Currency today for some friendly guidance. We offer several ways in which you can secure currency to help you balance risk and reward – helping you make your money go further.