GBP/USD[1]FUNDAMENTAL HIGHLIGHTS:
The recent dovish BoE rate[3] hike, in which the Bank voted in an 8-1 split to hike 25bps. The Pound[4] alongside rate expectations remain supported. However, while the lone dissenter who voted for the Bank Rate to be left unchanged grabbed market participants’ attention, there was also a notable change in the forward guidance.
February statement- Some further modest tightening in monetary policy "is likely" to be appropriate in the coming months
March statement- Some further modest tightening in monetary policy "may" be appropriate in the coming months
This in turn suggests that the BoE could be soon approaching a pause in the hiking cycle and adopt a wait and see approach. This takes into account the more cautious view on the UK’s growth outlook in light of the escalation of geopolitical tensions. As such, while money markets price in over 75bps worth of hikes in the next three policy meetings there is a risk the Bank pauses at 1%. Keep in mind that with a bank rate at 1%, the BoE will have an additional option to tighten monetary policy through active selling of gilts.
BoE Rate Expectations
Source: Refinitiv
What does this mean for GBP?
Now while a re-pricing lower would weigh on the Pound. It is worth highlighting that market participants have been reducing their exposure in GBP even in the lead up to the prior BoE meeting. Meanwhile, asset managers (real money funds) are holding a sizeable short position in the Pound, which may in fact provide a tailwind for the currency should geopolitical tensions ease. That said, aside from short term volatility from a re-pricing lower
