Pound's Carry Advantage Erodes Amid ECB Tightening

Deutsche Bank's Shreyas Gopal notes that Bank of England meetings have repeatedly seen early market speculation on tightening fade as decisions approach, keeping the British Pound stable and EUR/GBP in a narrow range.

However, he warns that a likely 6-3 vote to hold rates and unchanged guidance may now trigger Sterling weakness as its carry advantage versus the Euro erodes.

Gopal points out that each BoE meeting finishes with some degree of excitement around whether the next meeting could be the one where the MPC starts to tighten, but as the meeting draws closer, pricing decays towards zero and instead gets pushed further out the strip.

This pattern is consistent with the 'buying time' strategy from the Bank of England this year, which has been an appropriate response to a supply-driven inflation increase, and in a context of still mildly restrictive UK monetary policy and uncertainty over the labour market trajectory.