01 Feb 2023
The Pound declined against the Euro yet remained steady against the Dollar on Wednesday ahead of this week's key central bank meetings.
Investor focus will be on the Federal Reserve meeting on Wednesday and Thursday's Bank of England meeting, where a 50-basis point hike is anticipated this month and a 25-basis point rise in March.
The Bank of England Monetary Policy Committee's updated economic projections will be the principal focus, which may include an upward revision of this year's GDP forecasts, Reuters reports.
"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," according to Matthew Ryan, head of strategy at Ebury.
The sterling was flat against the greenback at $1.2318 at the time of writing and down 0.2% against the Euro at 88.36 pence.
"The BoE decision might weigh on Sterling if the BoE underdelivers and opts for a 25bp move only, as we expect," said Unicredit analysts.
A number of analysts are of the opinion that there was little room to drive the single currency higher, even with a hawkish stance on Thursday by the European Central Bank. As such, a potential rally for the Pound against the Euro would be "a function of risk sentiment rather than monetary policy divergence," says Reuters news agency.
"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, ING forex strategist.
Furthermore, the Dollar was down against the Euro on Wednesday ahead of the Fed meeting.
The Dollar index – measuring the currency against six rivals – dropped 0.15% to 101.96 on Wednesday morning after also declining in the previous session.