Rabobank's Senior FX Strategist Jane Foley outlines her baseline view on Bank of England (BoE) policy, citing softer United Kingdom (UK) Consumer Price Index (CPI), lower Oil prices and a slack labour market. Foley expects no change in BoE rates for the rest of the year, contrasting with market pricing for modest tightening over six months, and warns that further repricing could pressure the Pound and support EUR/GBP.

Stable policy stance versus market pricing

"While GBP will be keeping a close eye on the gilt market, short-term interest rates tend to be a larger driver of FX. This month’s release of softer than expected UK May CPI inflation data at 2.8% y/y for the headline rate, and the subsequent drop in oil prices should help contain inflation expectations."

"Against the backdrop of a slackened UK labour market, Rabobank’s baseline view is that the centrists within the MPC would only vote in favour of a rate hike if there were clear evidence that another period of prolonged high energy prices is generating second round inflation effects. With this in mind, RaboResearch is forecasting no change in BoE rates through to the remainder of the year."

"The market, however, is currently priced for around 20 bps of tightening on a 6-month view. A further re-pricing of BoE rate hike expectations is likely to weigh on the pound. We see scope for a moderate move higher in EUR/GBP on a 1-to 3-month view."

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