Synopsis:

MUFG analyzes the recent shift in the Bank of England's (BoE) communication strategy, as evidenced by comments from Chief Economist Huw Pill. This shift is stirring market speculation about earlier-than-anticipated interest rate cuts, affecting the outlook for the British Pound (GBP).

Key Points:

• Rhetoric Evolution: The BoE has progressed in its messaging from emphasizing the need for rate hikes to suggesting that rate cuts might be on the horizon, which could become more immediate than previously thought.

• Market Reaction: The speculation of earlier rate cuts has led to a rally in the three-month SONIA futures by about 10 basis points.

• GBP Stability: Despite these comments, GBP has not significantly underperformed, though the risk of downside remains present due to the evolving rhetoric.

Conclusion:

MUFG points out that while the recent comments from the BoE's Chief Economist have not yet triggered a significant decline in GBP, the currency could face downward pressure if the market continues to adjust to the central bank's shifting communication. The potential for rate cuts, appearing more imminent than before, introduces a cautious sentiment towards the GBP in the short term.