Synopsis:
Following the BoE’s March meeting, ING maintains its call for three rate cuts in 2025, though acknowledges that elevated data uncertainty and fiscal headwinds pose downside risks to UK growth and GBP. Despite inflation proving sticky, the BoE’s evolving tone—especially with Catherine Mann shifting away from dovish dissent—suggests greater openness to faster easing if labour market weakness emerges. Ahead of next week’s UK Budget, ING remains cautious on GBP and sees better downside opportunities in GBP/USD (Cable) rather than EUR/GBP.
Key Points:
1️⃣ BoE Hold with Subtle Hawkish Repricing 🏦
- Sterling curve saw a modest 5bp hawkish repricing after the BoE’s hold.
- Only one dovish dissenter left, as Catherine Mann reverted to a more neutral stance.
- BoE hinted that labour market deterioration could accelerate rate cuts.
2️⃣ Three Cuts Still Expected in 2025, But Risks Are Skewed 🔁
- ING’s base case: three cuts, but growth risks from tax hikes, tariffs, and fiscal squeeze weigh heavily.
- Sticky inflation means the Sonia curve only prices in two cuts, and rightly so.
3️⃣ UK Budget Next Week: Risk for GBP and Bonds 📉
- Upcoming corporate tax hikes and likely spending constraints will challenge growth.
- Budget likely to dampen sentiment for UK assets, limiting GBP upside.
4️⃣ GBP Weakness Best Played via Cable, Not EUR/GBP 💷
- ING sees limited scope for EUR/GBP to rise given supportive EUR dynamics.
- Prefers fading GBP strength via GBP/USD, especially if US data surprises to the upside.
Conclusion:
ING retains a bearish bias on GBP, especially into the UK Budget, expecting the mix of fiscal tightening, tariffs, and sticky inflation to reinforce downside risks to growth. With the BoE showing more flexibility, the risk is that GBP underperforms, particularly against the USD. Hence, shorting Cable is the preferred strategy over EUR/GBP.
