The immediate future of the British pound lies in Thursday’s Bank of England rate decision, followed by a monetary press conference.
No changes are expected this time around but the market has priced in a 50 percent chance that the BoE will lift rates in May, so most of the focus will be on the monetary statement.
If indeed the BoE comes out with a hawkish tone and signals that a rate hike is a distinct possibility in the coming months, the sterling should find strong support as long as, between now and then, the US stock market - and in particular the Dow Jones - doesn’t tumble again.
The fear is that the speech may be less than optimistic, as so many questions over the status of Brexit remain unanswered, and any movement higher in rates will hit the UK economy negatively at this delicate time.
“We think the appetite for making a big signal shift at this meeting is low and that the BoE might take a wait-and-see approach. This could send EUR/GBP slightly higher this week,” said Jens Naervig Pedersen, an analyst at Danske Bank.
Data released from the UK earlier today may give reason for the bank of England to keep rates on hold a little longer than anticipated.
The latest housing price index from Halifax hit the market at -0.6 percent, undershooting analysts’ expectations for a figure of 0.2 percent and posting the second straight month of declines, which in turn makes it evident that the UK property market is not ready for higher rates.
“The MPC can’t ignore the evidence of a housing market slowdown now in front of them, so we doubt that they will signal to markets tomorrow that interest rates could rise as soon as May,” said Samuel Tombs of Pantheon Macroeconomics.