• BoE meets on Thursday with a rate cut firmly on the cards

• Data has been positive but doves in control of the committee

• Pound could suffer on Thursday but still favoured against the euro

• Rate announcement at 11.00 GMT with the press conference held 30 minutes later

The Bank of England meets on August 1, the day after the Fed meeting that it is not currently expected to produce a surprise rate cut or a dovish shift. Assuming this expectation is confirmed, BoE members will probably face a true dilemma on whether to cut rates for the first time since March 2020 or postpone the decision for September, when the Fed will probably be closer to announcing its own rate cut.

Going into this meeting, BoE members will check if the data justifies a rate cut. Considering the tight labour market, average earnings growth continuing to print above 5%, and the recent PMI surveys pointing to consistent growth in both the services and manufacturing sectors, then the overall picture is not overly pessimistic. In addition, the housing sector could be also turning the corner, thus sending another positive signal for the growth outlook.

However, the doves would probably focus on the headline inflation rate dropping to 2% in the past months. The hawks’ counter argument would be the elevated core CPI rate, which remains stuck above 3.5%, and the much talked about services inflation printing at 5.7% in June.

Despite the obvious deceleration seen in these inflation indicators since the 2023 highs, the current levels are probably still too high for the hawks’ liking. If one adds up the fact that the producer price index indicator has been edging higher lately, potentially signaling a buildup of inflationary pressures down the line, then the current set up is probably incompatible with a central bank on the brink of a rate cut.

However, the inherent dovishness of the BoE and the quarterly forecasts are likely to swing the votes in favour of a 25-bps rate cut. In May, the BoE lowered its inflation forecasts, seeing inflation at 2.6% in one year's time and 1.9% in two years' time. A downward revision to these forecasts would clearly support the expected rate cut, despite the data being mostly positive.

Importantly, Governor Bailey appears to have the necessary votes to get the rate cut through the committee. However, governors are fond of getting their decisions approved with the largest possible support, with the market still remembering the former Governor Mervyn King being outvoted several times during his tenure.

Putting everything together, the market is assigning a 63% probability for a 25-bps rate cut on Thursday with the focus being on the hawks’ stance. They have been relatively quiet lately, which means that the possibility of being forced into a rate cut without being absolutely on board is gaining ground. However, Governor Bailey has to be extra careful and avoid the development of a rift within the committee, similar to the ECB one.

The pound has greatly benefited from the euro’s underperformance since the start of 2024. The latest leg was a combination of the political unrest in both Germany and France, and the UK finally returning to political stability.

A surprise BoE rate cut on Thursday could dent the pound’s recent momentum, especially if Governor Bailey appears very dovish at the press conference and essentially points to another rate move in September. However, considering the continued weakness seen in the euro area data and fact that the ECB is on course for another rate cut in September, the pound is still positioned well against the euro in the medium term.