British Pound Strengthens as Futures Curve Prices in 75bp of Tightening By Year End

The Bank of England is expected lift interest rates tomorrow, one upping the ECB who will hold off until June. This explains why the British pound has outperformed the Euro since the beginning of the week.

Both consumer confidence and retail sales increased in the month of April, confirming that the economy remains strong enough to whether another interest rate hike. Now a 25bp tightening has already been priced into the market so what traders will be watching for are surprises. There is a minority anticipating a 50bp rate hike tomorrow because the futures curve is pricing in one rate hike this month, one next month and one more before the end of the year, for a total of 75bp of tightening. As a central bank that likes to be quick to respond to economic developments, they could just do 50bp of tightening in one clip and let the economy absorb the move over the next few months. The last time the BoE raised rates by 50bp was in February 1995 so this is a low probability scenario, but nonetheless a plausible one.