What to expect from the BoE decision? The pound is under pressure.

On Thursday, the market's attention is focused on the decision Bank of England, which will most likely keep interest rates at 4%. Although the swap market estimates the chances of a cut at just 24%, pressure for unexpected cuts is growing in the background due to weaker inflation data (3,8% in September, below the expected peak of 4%) and the worsening economic outlook. However, the market seems to prefer caution until after Chancellor Rachel Reeves's budget announcement, which announces tax increases, which could slow GDP growth.

The effects of any potential tax increases will be known before the next meeting of the Monetary Policy Committee in February, so this seems to be the most reasonable moment to lower interest ratesThe market seems to share this view – ahead of the Bank of England meeting, the swap market is pricing in a 56% probability of a rate cut in February.

The pound exchange rate is under pressure

The pound remains under pressure against the dollar, with GBP / USD hovering around the key support level of USD 1,3010, well below the 200-day moving average – a very negative technical signal for the British currency. Announcements of tax increases and falling yields on British bonds (10-year gilts are down 27 basis points) are increasing the pressure on the pound to weaken.A less dovish stance from the Bank of England or a lack of support for the December rate cut could trigger a short-term upward correction in the pound, but current sentiment seems to favor further weakness.

A key element of today's BoE meeting could be the monetary policy report, which will for the first time include detailed sections describing the voting decisions of individual members, which aims to increase transparency of the Monetary Policy Committee's activities.

Easing monetary policy in Poland

Meanwhile, the Polish zloty reacted to the latest decision of the Monetary Policy Council by cutting rates by 25 basis points to 4,25%, which was in line with market expectations and motivated by the decline in inflation to 2,8% y/y in October and improved inflation forecasts for 2025-2026. This decision opens the way to further easing of monetary policy in Poland, although the Monetary Policy Council points to inflation risks related to fiscal policy and wage growth.Investors will now await President Glapiński's press conference, which should provide additional guidance on further monetary decisions and an assessment of the impact of the current economic environment on the złoty. The conference begins at 15:00 PM.

Source: Mateusz Czyżkowski, XTB