Markets are pricing in a rate hold after the BoE meeting on Thursday, following December inflation that came in slightly hotter than anticipated. However, markets also expect the easing cycle to continue, so traders will be keenly looking for signs of when the next cut will happen. That could come from the vote split and from the rhetoric used in the monetary policy statement.

At the moment, markets anticipate the next rate cut in April, which is two meetings from now. If Governor Andrew Bailey emphasizes deterioration in the jobs market, traders could pencil in a rate cut in March, which would weaken the pound. On the other hand, if Bailey seems more concerned about inflation, the next cut could be delayed, which would support the pound.
 

The Vote Matters

Traders will also be paying attention to the vote. At the last meeting, it was a narrow 5-4 in favor of a cut. The consensus is that it will once again be narrow, with the same hawks and doves, with Governor Bailey casting the tie-breaking vote in favor of a hold. This comes after his earlier comments this month about higher inflation.

However, Bailey maintained his view that inflation will return to target sometime this year, implying that the dovish outlook remains in place. It’s just a matter of timing, with the December inflation number potentially being an outlier. Traders might be more interested in the January CPI figures to get some directionality on future monetary policy.
 

No Need to Cut Soon

The BoE is in a different position than the ECB, and that is reflected in the relatively stronger pound recently. While the Euro gave back most of its gains from last week, the pound has remained relatively stronger against the dollar. This is likely a result of traders seeing less pressure on the BoE to ease in the current scenario.

The recent tumble in the dollar meant stronger currencies in Europe. This can pose a problem for central bankers, as it means consumer prices will not rise as quickly. A stronger currency means cheaper imports. For the ECB, with inflation falling below target, this can be a problem. But inflation is still well above target in the UK, meaning that a stronger pound would not likely put pressure on the BoE to ease policy as it would for the ECB.
 

It’s Down to the Economy

The UK economy has also been outperforming expectations, which gives the BoE more room to keep rates elevated. Although sluggish compared with the US, recent UK GDP data suggest that the impact of the Autumn Budget was minimal. This has caused traders to price in potentially more strength for the pound.

On top of that, a stronger economy would also mean more inflationary pressure. Combined, that means the BoE is facing unexpected reasons to keep rates unchanged, while other major central banks are inclined towards easing.

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