UK Housing Recovery Stalls, Pound Sterling Waits for BoE Rate Decision
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STORY LINK UK Housing Recovery Stalls, Pound Sterling Waits for BoE Rate Decision
The Pound has maintained a soft tone in currency markets with expectations of a dovish tone by the Bank of England (BoE) in Thursday’s policy decision.
There will inevitably be a spike in volatility following the decision with BoE guidance crucial.
The Pound to Dollar (GBP/USD) exchange rate hit lows just below 1.2470 on Wednesday before stabilising below the 1.2500 level.
The Pound to Euro (GBP/EUR) exchange rate dipped to 2-week lows just above the 1.1600 level before settling around 1.1620.
The RICS housing index held at -5 for April and compared with expectations of a tentative net improvement to -2.
According to the RICS; “The April 2024 RICS UK Residential Survey results show the recent recovery in buyer demand stuttering slightly, with the market seemingly impacted by the slight upward move in mortgage rates over the past few weeks. Nevertheless, forward-looking sentiment continues to point to a stronger picture for sales market activity coming through over the next twelve months.”
It added; “With financial markets recently paring back expectations around the potential scale of monetary policy loosening this year, near-term sales expectations appear to have been adversely effected. Indeed, the net balance for sales expectations over the coming three months dipped to -1%, marking the weakest reading since October 2023 (and now signalling a more or less stagnant near-term picture).”
Interest rates and trends in long-term UK bond yields will continue to have an important impact on the housing market.
In this context, the Bank of England (BoE) interest rate decision will be the key event during the day.
There are strong expectations that interest rates will be held at 5.25% at this meeting.
There is an important element of uncertainty over the vote split. It will be a big surprise if any member votes for a rate hike, but it is possible that one or more members will join Dhingra in backing a rate cut.
Assuming rates are unchanged, guidance from the bank will be crucial.
The language in the statement will be crucial and comments from Governor Bailey in the press conference will also be examined very closely.
In particular, markets will be monitoring whether there are clear hints of a rate cut at the June meeting.
According to ING; “At some point this summer we expect sterling to sell off, as it’s priced more like the ECB/euro cycle than the Fed/dollar. The question is whether BoE communication today triggers that adjustment or the adjustment happens in June, when softer UK services CPI could allow the BoE to turn more dovish at the June rate meeting and prepare the market for a rate cut in August.”
A clear signal of a June cut will leave the Pound vulnerable to further selling.
According to Bank of America; “With the market pricing in almost a 50% chance of a rate cut in June, any dovish signals from the BoE could significantly impact GBP valuation.”
ING added; “our base case remains for an 8-1 vote today, with risk of 7-2, should Dave Ramsden join Swati Dhingra in voting for a rate cut. A 6-3 vote would surely be a big dovish surprise today and hit sterling.”
In contrast, the Pound has lost ground into the decision and there is scope for some resilience and short covering if there are no clear hints of a near-term rate cut.
On the Pound reaction, ING commented; “Should the BoE fail to deliver a markedly dovish message today, we doubt sterling has to rally too hard. 1.2530/2550 and 0.8580 could be the limit of sterling’s rally for GBP/USD and EUR/GBP respectively. (1.1655 for GBP/EUR).”
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TAGS: Pound Sterling Forecasts
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