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All eyes on Threadneedle Street as the Bank of England announces its rate decision at noon.
The pound is steady this morning ahead of what promises to be a consequential 48 hours for currency markets. The Bank of England announces its first interest rate decision of the year at noon, followed by the European Central Bank tomorrow. Both are expected to hold fire.
Sterling enters the day supported by a brightening UK economic outlook, though the path to further rate cuts has been complicated by the recent unexpected rise in inflation to 3.4%. While Andrew Bailey led a narrow cut in December, markets now see a 95% chance he will keep borrowing costs steady at 3.75% today to ensure price stability.
Eurozone inflation data published yesterday gave the ECB little reason to change course. Consumer prices rose just 1.7% in January – the first reading below the 2% target since last spring. Core inflation also retreated to a four-year low at 2.2%. With price pressures easing faster than expected, rate-setters in Frankfurt look set to keep policy steady tomorrow.
Across the Atlantic, investors are still digesting President Trump’s nomination of Kevin Warsh as the next Federal Reserve chair. The dollar rallied on the news last week, gaining against almost every major currency as markets viewed Warsh as more credible – and potentially more hawkish – than feared. Gold and silver suffered their worst week in years, though prices have since stabilised somewhat.
The mood in precious metals improved this week, but the underlying message is clear: fears about Federal Reserve independence have eased. For now, at least. Warsh’s reputation as an inflation hawk reassured investors who had worried Trump might install a loyalist willing to slash rates regardless of economic conditions.
Back in the UK, economists polled by Reuters overwhelmingly expect rates to stay unchanged today, though the real intrigue lies in the vote split. December’s decision was narrowly carried five votes to four. Any shift in that balance – or in the Bank’s quarterly forecasts – could move sterling more than the headline decision itself.
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GBP: Decision day arrives
The spotlight falls squarely on Threadneedle Street at midday. Most expect rates to stay at 3.75%, with external MPC members Alan Taylor and Swati Dhingra likely to push for a cut. The accompanying Monetary Policy Report will update the Bank’s inflation forecasts – any hint that price pressures are easing faster than expected could shift expectations for cuts later in the year.
GBP/USD: the past year
EUR: Inflation slides below target
January’s inflation reading of 1.7% puts the eurozone firmly back on the ECB’s home turf. Core prices fell to their lowest since late 2021. While services inflation remains sticky at 3.2%, the broader trend gives Christine Lagarde room to breathe. Markets see virtually no prospect of a move tomorrow and are pencilling in unchanged rates for much of 2026.
GBP/EUR: the past year
USD: Warsh effect reverberates
The dollar has held its post-nomination gains as investors assess what Kevin Warsh might mean for monetary policy. Some see a safe pair of hands who will preserve the Fed’s independence; others warn his hawkish past could slow the pace of rate cuts. With Jerome Powell’s term ending in May, Treasury yields and the greenback may remain sensitive to any fresh signals from Washington.
EUR/USD: the past year
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