On Wednesday, the British pound dropped slightly against the euro and held steady against the US dollar, as investors geared up for major central bank meetings on Thursday.
Both the Bank of England (BoE) and the European Central Bank (ECB) are scheduled to have their meetings on Thursday.
Investors are also keeping a close eye out on the Federal Reserve’s meeting’s outcome later on Wednesday.
They are also anticipating that the BoE would deliver an interest rate hike of 50 basis points on Thursday and then deliver another one of 25 basis points in March before ending the tightening cycle.
The focus will be on the economic projections of the Monetary Policy Committee (MPC) of the Bank of England (BoE).
There is a possibility that the GDP forecasts for 2023 may see an upward revision because of lower energy prices and domestic demand that has proven to be resilient.
Most economists believe that the expected economic downturn would be shallower than they had expected.
Market analysts said that a hike of 25 basis points would take the markets by surprise and would result in a sharp sell-off in the sterling, no matter what the rhetoric of the central bank may be.
The pound was trading flat against the greenback at a value of $1.2318. Analysts said that the pound may take a hit if the BoE decides to deliver a 25 basis points hike rather than a 50 basis points one.
There was a 0.2% drop in the Sterling against the euro, which saw it trading at 88.36 per euro. Some analysts said that the euro may not record many gains, even if the ECB opts to be hawkish on Thursday.
This means there is a chance that sterling could record a rally against the euro, but this would be due to risk sentiment and not because of a divergence in the monetary policy.
Forex strategists said that as compared to the euro, the British pound often shows more sensitivity to the global risk sentiment.
Therefore, the risks show that the EUR/GBP pair will see an upside considering that the Fed continues to be hawkish, which would automatically put pressure on risk assets.
On Tuesday, the International Monetary Fund (IMF) published its economic growth outlook forecasts for 2023 and the only Group of Seven nation countries to have seen a decline in its numbers in Britain.
Market analysts said that there was no way to determine if things would turn out to be just as bad as the IMF had predicted, or whether other countries will also see an economic recession.
They also said that they could not ascertain if the current weak growth that the UK is recording would actually turn into a problem in the long term.
While the last year had not been a good one for the Sterling against the US dollar, it has managed to climb up once more since the start of 2023.