Currency option investors are looking for the Bank of England’s rate decision to have a bigger near-term impact on the pound than European Central Bank’s move later Thursday will have on the euro.
(Bloomberg) — Currency option investors are looking for the Bank of England’s rate decision to have a bigger near-term impact on the pound than European Central Bank’s move later Thursday will have on the euro.
Both central banks are forecast to raise their benchmark rates by 50 basis points Thursday, but with the UK forecast by the International Monetary Fund to be the only Group of Seven member whose economy will shrink this year, market rates indicate more volatility in sterling than the euro.
A measure of expected moves for the two currencies over the next day is assigning a 73% probability that the pound will trade within a 300 pip range over that time period compared with 242 for the euro.
“Weak UK cyclical data of late raises the chances of a smaller than expected hike by the BoE and/or a dovish hike, so options markets are factoring that risk in,” said David Forrester, senior FX strategist at Credit Agricole CIB Singapore Branch.
At the BOE’s December meeting the monetary policy committee was split three ways on the decision. Six members including Governor Andrew Bailey voted for the half-point rise. Catherine Mann favored three-quarters of a point, while Silvana Tenreyro and Swati Dhingra backed leaving rates unchanged.
Eleven out of 46 economists in a Bloomberg survey are predicting a 25 basis-point rate increase by the BOE with the remainder forecasting a 50 basis-point hike. Adding to the uncertainty is the chance that the UK central bank may issue forecasts Thursday underscoring the risk that inflation is becoming more persistent. While euro-zone inflation slowed to 8.5% last month, it remained stubbornly above 10% in the UK.
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