MUFG examines the potential outcomes of the Bank of England's (BoE) February meeting and its implications for the EUR/GBP currency pair.
Expected BoE Policy Update:
- MUFG anticipates a less hawkish update from the BoE, possibly dropping their tightening bias.
- The BoE might reconsider its stance of keeping policy "restrictive for an extended period" and its willingness to raise rates if persistent inflationary pressures are observed.
Inflation and Policy Rate Cuts:
- A slowdown in UK inflation by the end of last year could influence the BoE's decision-making.
- While headline inflation may align closer to the BoE's target mid-year, concerns about core and services inflation remaining high might lead to a cautious approach.
Impact of the UK Government’s Budget:
- The upcoming government budget on 6th March, potentially featuring fiscal giveaways ahead of the election, might affect the BoE's inclination to cut rates.
- Unless the BoE signals a likely rate cut in May, MUFG sees potential for the EUR/GBP pair to drop below the 0.8500 level.
MUFG anticipates a shift towards a less hawkish stance from the BoE in its upcoming February meeting. The decision will be influenced by recent inflation trends and the impending government budget. This could lead to further decline in the EUR/GBP pair, particularly if the BoE refrains from signaling an early rate cut.