By Yasin Ebrahim
Investing.com -- The Bank of England is expected to lift interest rates later this week, but that is unlikely to provide the pound with the fire power it needs to continue its rally against the dollar as rate hike expectations have mostly been priced in.
GBP/USD fell 0.60% to $1.2171.
“Even if the BoE was to sound hawkish, sticking determinedly to its course this is unlikely to support Sterling in a significant manner as a lot has already been priced in,” Commerzbank said in a note.
With the Bank of England widely expected to raise its benchmark rate by 0.5% to 1.75% on Thursday, investor focus, Commerzbank says, will be on what the BoE will signal for the rest of the cycle.
As a hawkish-sounding BoE has mostly been priced into the recent move in the pound, less hawkish remarks would force investors to lower their expectations of peak rates, drawing a big move lower in GBP/USD. Traders currently expect the BoE to raise interest to a peak of 2.75% by the start of 2023.
“A reduction of the speed and the peak of the rate cycle on the other hand would probably hit Sterling hard, in particular against the background of high inflation levels. GBP-USD might then have another go at the 1.20-mark,” Commerzbank added.
Others agree, though point to political developments that could lengthen the BoE's rate-hike runway.
"The risks related to a dovish repricing in the BoE curve continue to highlight the net monetary policy impact for the pound over the coming months should be largely negative, if anything," ING said, though added that further Bank of England rate hikes may be supported by political developments. "[P]otential tax cuts depending on the result of the Conservative leadership contest, could ultimately see the Bank deliver another 25-50bp on top of what we’ve been forecasting."
The race to become the leader of the ruling Conservative party and next U.K. Prime Minister is expected to heat up in the coming weeks. Rishi Sunak, who is trailing fellow Conservative lawmaker Liz Truss, recently pledged to cut personal taxes by 20% by 2029. The Tory party's next leader will be announced on Sept. 5.