It is if the BOE hints at possibly more to follow
This has been a hot topic throughout the whole of this week (⬆️) and will continue to remain so in the lead up to next week and ahead of the BOE’s 30 January policy meeting.
Odds of a 25 bps rate cut in January now rest at ~63% with the rates market more or less fully pricing in such a move by the 7 May meeting as of today:
There are many quarters in the market that have a more bullish outlook for the pound this year especially after the election results. However, the two big caveats that could spoil such a call are a no-deal Brexit and the BOE turning even more dovish.
If this is a one and done scenario, I reckon there is room for the pound to retrace back higher given how the market has already aggressively priced in the move.
Looking at the near-term, if a January rate cut fails to materialise and we still see a 7-2 vote, that will also provide a tailwind for the pound to keep higher until there are more signs that BOE policymakers are going to firmly lean towards cutting rates.
As such, I don’t think a rate cut at the end of this month would spell massive downside for the pound. Instead, any significant drop in the currency is likely to only follow if the BOE signals the potential for more rate cuts down the road.
That will be the real fear for the pound rather than an “insurance” rate cut amid weaker economic conditions and flagging inflation pressures.
Looking ahead, next week is going to be a big one as we will have UK labour market data on 21 January before post-election PMI data on 24 January. Oh, that’s not to forget that we’ll also be getting December retail sales data tomorrow.