Sterling Faces Fresh Headwinds as Bank of England Prepares Rate Cut Amid European Central Bank Turmoil
The pound sterling finds itself in treacherous waters today as the Bank of England prepares to deliver what markets widely expect to be a 25 basis point rate cut to 3.75%, marking another blow to Britain's economic sovereignty in an increasingly volatile global landscape.
With Governor Andrew Bailey expected to switch to the dovish camp, the risk of a 6-3 vote looms large, potentially delivering a more aggressive dovish signal than the anticipated 5-4 split. This comes as yesterday's inflation data showed a sharp fall in food prices, providing ammunition for those pushing for looser monetary policy.
European Central Bank Adds to Sterling's Woes
The timing could hardly be worse for Britain, with today's European Central Bank meeting threatening to unleash fresh turbulence across currency markets. After last week's hawkish turn, investors are scrutinising whether ECB President Christine Lagarde can maintain credibility as inflation forecasts face potential downgrades.
The delayed ETS2 carbon tax could strip 0.2% from 2027 headline inflation forecasts, creating an awkward narrative for the ECB as it grapples with undershooting its targets. Such developments could see EUR/USD tumble towards 1.1680-1.1700, dragging sterling down in its wake.
Speculative Positioning Offers Glimmer of Hope
However, Britain's currency may find an unlikely ally in stretched positioning. Data from the Commodity Futures Trading Commission reveals asset managers maintain substantial short positions worth 38% of open interest, representing some of the most bearish sterling positioning witnessed over the past five years.
This extreme positioning could limit further downside, with EUR/GBP potentially spiking to 0.8820-0.8840 on the Bank of England announcement before retreating, possibly to 0.8750, depending on ECB developments.
Dollar Strength Compounds British Challenges
The US Dollar Index remains firmly supported above 98.00, with Federal Reserve official Chris Waller's dovish comments yesterday failing to dent dollar strength. Despite acknowledging the policy rate sits 50-100 basis points above neutral, Waller showed no urgency for rate cuts, with January action priced at just 25%.
Today's delayed CPI reading, expected to show 3.1% year-on-year headline inflation, will likely reinforce the sticky inflation narrative that has kept Fed officials cautious about aggressive easing.
Nordic Central Banks Add to European Uncertainty
Sweden's Riksbank and Norway's Norges Bank also announce policy decisions today, adding to the complex web of European monetary policy. After cutting rates to 1.75% in September, the Riksbank appears positioned for an extended hold, though any hawkish surprises could benefit the Swedish krona.
Norway's central bank shows no inclination to reduce its 4.00% deposit rate, with cuts not expected until 2026's second quarter. This hawkish stance contrasts sharply with the dovish pivot expected from the Bank of England.
As Britain navigates these choppy waters, the pound's fate hangs in the balance between stretched positioning that could limit downside and fundamental pressures that continue to mount. Today's central bank marathon will likely determine whether sterling can maintain its footing or faces another leg lower in what has already been a challenging period for the British currency.