Sterling slightly lower versus euro before central bank meetings

Sterling edged down versus the euro and held steady against the dollar on Wednesday as investors braced for major central bank meetings, including the Bank of England (BoE) on Thursday.

Investors will closely watch the outcome of the Federal Reserve meeting later today while anticipating that the BoE tightening cycle will end soon with a 50-basis-point (bps) rate hike on Thursday and 25 bps in March.

They will focus on the BoE Monetary Policy Committee’s updated economic projections, which might include an upward revision to the 2023 GDP forecasts due to more resilient domestic demand and lower energy prices.

Most economists, when questioned, said the economic downturn was more likely to be shallower than they currently expect rather than deeper.

“A 25bp hike would be a fairly significant surprise for markets and, in our view, would likely trigger a rather sharp sell-off in the pound, regardless of how this is dressed up in the bank’s accompanying rhetoric,” said Matthew Ryan, head of strategy at Ebury. The pound was flat against the dollar at $1.2318.

“The BoE decision might weigh on sterling if the BoE underdelivers and opts for a 25bp move only, as we expect,” Unicredit analysts said in a note. Sterling was down 0.2% versus the euro at 88.36 pence per euro.

Sterling clings to recent gains

Some analysts reckoned there was little scope to push the euro higher even in case of a hawkish European Central Bank on Thursday, which means that a possible pound rally against the euro would be primarily a function of risk sentiment rather than monetary policy divergence.

“Since the pound tends to be more sensitive to global risk sentiment than the euro, the risks are skewed to the upside for EUR/GBP today given our baseline scenario for a hawkish Fed weighing on risk assets,” said Francesco Pesole, forex strategist at ING.

Britain is the only Group of Seven nation to have suffered a cut to its 2023 economic growth outlook in International Monetary Fund (IMF) forecasts published on Tuesday.

“It is far from certain whether it will turn out to be as bad as the IMF predicts or whether there will be a recession in other countries too, and whether weak UK growth really will turn into a long-term problem,” said Ulrich Leuchtmann, head of forex and commodity research at Commerzbank.