Even though the market is dedicating the bulk of its attention to the ECB monetary policy meeting, the Bank of England announcement is actually the one that could lead to more volatility in the currency market.
The BoE is expected to cut interest rates by 25bp, but there is a small chance of a 50bp reduction. Conditions in the UK housing market have steadily gone from bad to worse with prices falling by the most since 1992 and mortgage approvals dwindling to the lowest since 1995. However like the ECB the Bank of England struggles with inflationary pressures. Bank of England Governor King is committed to making sure that inflation does not become entrenched but comments from UK Prime Minister Gordon Brown suggests that the most likely option by the BoE is still a quarter point rate cut. Brown told BBC news that “because we’ve got low inflation we can cut interest rates.” How the British pound reacts to the latest interest rate cut will depend upon whether the BoE signals more easing. Getting a rate cut from the BoE has been like pulling teeth which is why we expect more neutral comments from the UK central bank.