Heading into the BoE meeting expectations from Short Term Interest Markets are that the BoE will definitely hike by 25bps and maybe as much as 50bps. At the time of writing STIR markets see an 86.5% chance of a 50bps rate hike and a 57% chance of a 75bps hike. In its June meeting, the Bank of England hiked rates by 25 bps to 1.25% last week in a move that was widely anticipated. Headline inflation is expected to move into double digits and growth is expected to turn negative in 2023. This stagflationary environment has been weighing on the GBP for some time. You can see from this GBP index chart that the GBP has been sold pretty steadily since April.

So, in this environment, the risk is that the BoE is not even more dovish than has already been priced in. The cost of living crisis, double-digit inflation (currently at 9.4% y/y), and slowing growth have all been priced in. The BoE projects that the UK can head into a recession in 2023, so the GBP will be very sensitive to any good news from the BoE meeting. The key things to watch from the BoE will centre around growth and inflation.

Latest economic data

The UK jobs print on July 19 was a mixed print. Employment numbers were up 296K above maximum expectations of 200K and June claimants were down by – 20.1K. However, UK average earnings including bonuses were up 6.2% below 6.7% expected. UK inflation is at 9.4% y/y for June and that will keep the pressure on the BoE to hike. The PMI prints for July were pretty strong beating on services (53.3), manufacturing (52.2), and composite (52.8) readings.

The takeaway

The most likely outcome is that the BoE will hike by 25bps and still warn of a 2023 recession. As these are the baseline expectations the best opportunity would come from any good news or more optimistic tones on growth for 2023 coming from the BoE. In that instance then the EURGBP could see some further falls.