Francesco Pesole at ING argues that Bank of England (BoE) tightening expectations, now close to European Central Bank (ECB) pricing, look excessive given the higher starting rate and less hawkish BoE stance. He sees scope for dovish repricing after today’s meeting, upside risks for EUR/GBP, and notes that United Kingdom (UK) political uncertainty could further weigh on Sterling in coming weeks.

BoE seen over-priced on tightening

"The Bank of England faced another round of hawkish repricing yesterday, with expectations for year-end now close to that of the ECB, around 80bp of tightening. We think this is excessive: the ECB’s starting point is 150bp lower, and policymakers in Frankfurt have been more hawkish than their BoE counterparts."

"Today’s BoE rate announcement could therefore prompt some dovish repricing in the curve and lift EUR/GBP as the ECB’s tone could instead keep tightening expectations relatively firmer in the EUR curve. We expect an 8-1 vote split in favour of a hold, with Chief Economist Huw Pill voting for a hike. "

"However, we don’t expect the Bank to add fresh clues about policy direction. The outside chance on the hawkish side is that Greene and Mann also vote for a hike, and on the dovish side that Governor Bailey pushes back against aggressive pricing."

"Politics remains the other central theme for sterling. Yesterday, comments by Labour Manchester mayor Andy Burnham hit both the gilt market and GBP. He is seen as a potential replacement for PM Keir Starmer, and widely considered a fiscal dove. Even yesterday, he reiterated that defence spending could be exempted from the fiscal rule, a very sensitive point for the bond market. "

"EUR/GBP faces upside risks from potential Labour underperformance and growing concerns about government stability. We still expect a move above 0.8700 in the near term."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)