Bank Of England Stance And Implications For Sterling
We see the Bank of England holding rates steady, even as the latest UK inflation data for May came in at 3.1%. The Bank will likely talk tough on inflation but ultimately avoid any policy tightening this year. This creates a clear weakness for the pound against currencies backed by more proactive central banks. This cautious stance from the Bank of England is not new; we saw them hold rates in 2011 when inflation surged past 5%. They are betting that the current inflation spike is temporary and will fade without intervention. We believe this patience will translate directly into a weaker pound in the short term.Monetary Divergence: Dollar And Euro Versus Pound
The US Federal Reserve is signaling more rate hikes to combat their own persistent 3.8% inflation, which will continue to strengthen the dollar. We expect this will push GBP/USD down towards the 1.3200 area over the next few weeks. Buying put options on the pound against the dollar is a way to position for this expected decline. We also see the Euro gaining on sterling, with a target of 0.8700 for the EUR/GBP pair. The European Central Bank is sounding increasingly willing to tighten policy, creating a clear divergence with the Bank of England. Call options on EUR/GBP could be considered to capitalize on this potential move higher.Start trading now — click here to create your real VT Markets account.
