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British Pound (GBP) Outlook: GBP/USD, EUR/GBP Ahead of BoE Rate Decision

By Justin Mcqueen

15:13, 1 February 2023

Bank of England Outlook - Source: GettyImages

GBP/USD Outlook Ahead of the Bank of England

The Bank of England which has been dovish hikers throughout this tightening cycle is seen delivering another 50bps rate hike at the February meeting. Market pricing is at 88% for 50bps with 12% for 25bps. However, as we have seen throughout this cycle, merely matching consensus is unlikely to be enough to provide a lift for GBP. As such, the focus will be firstly on the vote split followed by the accompanying statement/MPR. 

A reminder that at the December meeting, there had been a three-way split with Catherine Mann the most hawkish, voting for a 75bps rate increase, while at the other end of the spectrum, Silvana Tenreyro and Swati Dhingra voted to leave the bank rate unchanged at 3% and the rest of the committee voted for a 50bps hike. There is a risk of another three-way split, this time with Catherine Mann joining the majority at 50bps, while some of the members previously voting 50bps may shift slightly to 25bps and Tenreyro/Dhingra stick with unchanged. That said, my view is that the risk of a 25bps hike is greater than what is currently priced into the market as the central bank nears the end of its hiking cycle. 

At the present time, money markets are pricing in another 90bps of tightening, which implies a rate around the 4.5% region. However, I am slightly geared towards 4.25%. Inflation is moving in the right direction, but demand is taking a hit, as witnessed by weak retail sales and gas prices have collapsed. Although, rising wages are among the key concerns at present, which in the most recent jobs report showed a continued increase. With all this in mind, the aggressive rate hikes are very much in the rearview mirror and for the Bank of England to potentially highlight this, they could opt to drop “forceful” from their current rate guidance. A dovish shift that would likely weigh on the Pound as markets reprice a lower terminal rate. 


For the past month, the Pound has been riding the coattails of a stronger Euro against the USD. GBP/USD is up around 2% YTD, however, 1.2450 remains a stumbling block for Cable, perhaps we see this level tagged after the FOMC as it is difficult to see what Chair Powell can say to change the weaker USD narrative at present. That said, I am biased to fade rallies in GBP, given that the UK is much more vulnerable to the lagged impact of rate hikes. As shown at the table below, the Pound has often fallen in response to a dovish Bank of England.


0.67 Price
-0.090% 1D Chg, %
Long position overnight fee -0.0081%
Short position overnight fee -0.0001%
Overnight fee time 21:00 (UTC)
Spread 0.00006


165.03 Price
+0.250% 1D Chg, %
Long position overnight fee 0.0081%
Short position overnight fee -0.0163%
Overnight fee time 21:00 (UTC)
Spread 0.028


1.24 Price
+0.020% 1D Chg, %
Long position overnight fee -0.0067%
Short position overnight fee -0.0015%
Overnight fee time 21:00 (UTC)
Spread 0.00013


133.15 Price
+0.230% 1D Chg, %
Long position overnight fee 0.0104%
Short position overnight fee -0.0186%
Overnight fee time 21:00 (UTC)
Spread 0.010

GBP/USD Reaction During Current BoE Tightening Cycle

GBP/USD Reaction to BoEGBP/USD Reaction to BoE. Photo: Source: Bloomberg


Monetary policy divergence has been the name of the game since the December meeting for the ECB and BoE. However, the pair has been somewhat range-bound since the beginning of the year with resistance at 0.89 at continuing to cap. While I am sympathetic to the view of higher EUR/GBP on the divergence play, I suspect gains would ultimately struggle to make much headway above 0.90. The cross does not often rise above 0.90 unless there is a significant deterioration in the UK outlook such as the Liz Truss mini-budget, Brexit or sizeable risk aversion. In turn, while the bias is higher, it does feel as if EUR/GBP is more of a range trade. 

 EUR/GBP Chart: Daily Time Frame

EUR/GBP ChartEUR/GBP Chart. Photo: Source: Tradingview

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