GBP is firmer versus USD but weaker against EUR. In our view, stagflation headwind in the UK threatens further GBP depreciation versus EUR. The Bank of England (BOE) policy rate decision (7:00am New York, 12:00pm London) and Governor Andrew Bailey’s press conference half an hour later take the spotlight today, BBH FX analysts report.

GBP weakens against EUR ahead of key BoE decision

"The BOE is widely expected to cut the policy rate 25bps to 4.00% and reiterate its guidance for 'a gradual and careful approach' to further rate cuts. UK real GDP contracted in April and May, but stubbornly high UK underlying inflation will keep the BOE cautious. The focus will be on the Monetary Policy Committee (MPC) vote split, and Monetary Policy Report (MRP)."

"At the last June 19 meeting, the MPC voted by a majority of 6-3 to keep rates on hold. Taylor, Dhingra, and Ramsden preferred to reduce the Bank Rate by 25bps. Economists surveyed by Bloomberg predict a three-way split this time around: 5 for 25bps cut, 2 for hold, and 2 for 50bps cut. An even split between no change and a 50bps cut would support the BOE’s cautious easing message and leave GBP broadly unaffected."

"The MPR will include fresh economic projections and a formal review of the past year’s quantitative tightening (QT). The BOE is expected to flag that it plans to slow the pace at which it shrinks its bond holdings. Between October 2024 to September 2025, the BOE will have reduced its holdings of gilts by £100bn to £558 bn. Maintaining the current £100bn pace of gilt runoff over the next 12-month period risk pushing long-term gilt yields higher, as a smaller volume of maturing bonds mean the BOE must sell a record £51bn of gilts."