Sterling set for largest weekly decline vs. USD since December

The UK's pound sterling is on the verge of its largest weekly decline against the dollar since December, as anticipation builds for the interest rate decision by the Bank of England (BoE) scheduled for next week.

This downturn for the British pound follows a period where it showed considerable strength, bolstered by expectations that the BoE might maintain elevated interest rates longer than other major central banks.

A recent BoE survey revealed a drop in the British public's inflation expectations for 2024 over the last three months, potentially offering some comfort to BoE officials deliberating on the timing for interest rate reductions.

GBP/USD slips, euro sees mild gains against pound

As of the latest, sterling remained relatively stable against the dollar at $1.27535, but is poised for a 1% decline over the week. Meanwhile, the euro saw a slight 0.1% increase against the pound, reaching 85.40 pence.

Economic data released this week showed a resurgence in Britain's housing market in February, while the overall UK economy grew by 0.2% in January after slipping into recession in late 2023.

Market consensus currently points to the BoE maintaining the UK interest rate at 5.25% in its upcoming meeting, with market predictions suggesting a slower pace of rate cuts compared to the European Central Bank and the Federal Reserve this year.

In a note shared with the Reuters news agency, economists at BNP Paribas wrote:

"We think the BoE will steer clear of indicating when it will likely start cutting, retaining its neutral guidance from February”. 

They added that they expected the first BoE cut in June, with a total 1 percentage point reduction over 2024.

GBP forecast: Rabobank sees GBP/USD recovering to 1.30 area on 12-month view

Economists at Rabobank shared a more long-term GBP forecast in a note dated March 14. The bank said it retains a “constructive” view for pound sterling this year:

“On balance, we retain a modestly constructive picture for GBP vs. the EUR for the year ahead. This is supported by our house expectation that the BoE could retain steady policy until September. This compares with our forecast of rate cuts from both the ECB and the Fed in June. We continue to forecast a move to EUR/GBP 0.8400 in the latter half of this year."

At the time of writing on March 15, the GBP to USD currency pair, widely known as “cable” in forex markets, traded flat at $1.2755 — up 0.02% on the day. The U.S. dollar index (DXY) was also flat at 103.35.

The EUR to GBP rate saw the euro strengthen against the pound, gaining 0.09% to 85.42p.