The Bank of England is set to meet on Thursday, and there is speculation that a rate cut might be announced. Despite positive data, the doves seem to have control of the committee, which could lead to a rate cut decision. The pound could potentially suffer due to this decision, although it is still expected to perform better against the euro.
The recent positive data includes a tight labour market, high average earnings growth, and growth in both the services and manufacturing sectors. However, the headline inflation rate has dropped to 2%, which might be a concern for the doves. On the other hand, the core CPI rate remains high, along with services inflation at 5.7% in June.
The quarterly forecasts, along with the inherent dovishness of the Bank of England, are likely to tip the balance in favour of a rate cut. Governor Bailey seems to have the necessary support for this decision, although avoiding a rift within the committee is crucial. The market is currently assigning a 63% probability for a 25-bps rate cut.
If the rate cut is announced, it could potentially impact the pound’s recent momentum, especially if Governor Bailey hints at another rate move in September. However, considering the weakness in the euro area data and the expected rate cut by the ECB in September, the pound is still expected to perform well against the euro in the medium term.