The British pound edged lower against the U.S. dollar on Tuesday before the Bank of England's policy announcement on Thursday as markets moved to fully price in two quarter-point rate cuts this year. A survey of economists polled by Reuters expects the BoE to keep interest rates unchanged when it announces its decision this week, but analysts expect the central bank to leave the door open to lower interest rates as early as June.
Traders price in 53 basis points of easing this year, implying at least two quarter-point cuts, having previously fully priced only one after inflation data last month showed prices slowed by less than expected in March. "We think they're going to sharpen their communication and we think another member will vote for a rate cut," said Danske Bank FX analyst Kirstine Kundby-Nielsen, who expects two of the nine-member Monetary Policy Committee to vote to lower borrowing costs this week.
"We think the market reaction will send euro-sterling higher and overall weaken the pound," Kundby-Nielsen added. The pound was last down 0.2% against the dollar at $1.2534, and was at 85.86 pence per euro , down by 0.1%.
The British currency has been one of the better performers among major currencies this year, having only fallen 1.5% year-to-date against the strong dollar, versus a 2.5% drop for the euro and an 8.5% decline for the yen . The Dow climbed half of one percent, the S&P 500 rose 1 percent and the Nasdaq added one-point-two percent.
But as signs emerge that inflation is falling towards target and policymakers, including Governor Andrew Bailey, sound more comfortable with the trajectory of inflation, markets have moved to price additional easing.
We believe GBP is poised to weaken with it defying gravity for too long," said Paul Mackel, global head of FX research at HSBC in a note. Elsewhere, British construction companies enjoyed their fastest expansion in more than a year during April, despite a further drop in house building, a survey showed on Tuesday.
"After two years of stagnation, the economic recovery is becoming more established and is broadening," said Peter Arnold, EY UK chief economist, referring to the construction data.
"Though it's still very early days, another solid increase in GDP in Q2 seems a feasible prospect." Official data on first quarter economic growth is due on Friday, where economists polled by Reuters expect GDP to have expanded 0.4%, after shrinking 0.3% in the final quarter of last year.
