Pound Supported Despite Rising External Inflation Risks

The pound remains one of the top-performing G10 currencies since the conflict in the Middle East began at the end of February, despite recent turmoil. Following last night's FOMC decision, market attention shifts to today's Bank of England (BoE) policy meeting.

A preview of the meeting was published on Tuesday by Mufg Research, which expects the BoE to remain on hold and forecasts a September rate hike at 50%. However, the rates market is more priced for some signs of increased concerns shifting the MPC toward a hike, with a hike now fully priced by November.

The key takeaway from today's meeting will likely be that the Monetary Policy Committee (MPC) remains somewhat divided on inflation pass-through and domestic economic conditions. The energy backdrop worsens due to crude oil and natural gas price rebounds, while US signals further escalation.

A prolonged energy price rise could force the BoE to act, even in circumstances of mixed labour market conditions. However, with a hike in September now priced at 60%, any sharp move higher in yields is unlikely today, especially after yesterday's notable move in Gilt yields.