The Bank of England (BoE) hiked the Bank Rate (key policy rate) by 50 bps to 5.00%. EUR/GBP initially moved lower but fully retraced the move within the hour. Economists at Danske Bank discuss the pair’s outlook.

Stay negative on GBP despite 50 bps surprise

The BoE surprised markets and analysts by hiking policy rates by 50 bps, bringing the Bank Rate to 5.00%.

We view the 50 bps hike as front-loaded in nature with wage growth and inflation having surprised to the topside. We pencil in 25 bps rate hikes in August and September. This would mark a peak in the Bank Rate of 5.50%.

On balance, we continue to see relative rates as a positive for EUR/GBP from here, which is one of several reasons behind our fundamental predisposition of buying EUR/GBP dips. 

We highlight that whether the aggressive BoE market pricing will subside or inflation continues to surprise, we see it as headwinds for GBP.