The title of yesterday’s report was: will the Bank of England cut? And the answer is yes, it is planning to cut its rates soon. This – expected and concretized dovish shift – was the major takeaway from the BoE’s latest MPC meeting that took place yesterday. None of the 9 MPC members voted to hike the policy rate yesterday, 7 of them voted to maintain it, and 2 of them voted to cut – as Dave Ramsden opted for an immediate rate cut.
How soon? Governor Bailey said that the June meeting ‘is neither ruled out nor a fait accompli’. We have two sets of inflation and labor data before the next decision, so the expectations will likely swing but in the wake of the BoE meeting, the market gives a 50% for a June cut, and an August cut is seen as a sure thing.
If we summarize and give a structure to the FX outlook, the major currencies are operating in a three-speed environment. The Federal Reserve can’t cut rates because inflation is stagnating – and worse, picking up momentum to the upside, the European Central Bank and the BoE are convinced that inflation in their homes will continue to ease and the diverging inflation dynamics keep them on the path to cut their rates this summer.
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