The outlook for the British pound looks dim as the Bank of England is widely anticipated to follow up their October 8 and November 6 rate cuts with yet another aggressive reduction on Thursday morning. Currently, the markets are betting on a 100bp cut to 2.00%, which would bring the Bank Rate its lowest level since 1939. However, the BOE's subsequent monetary policy statement will be just as important, as it will provide a gauge as to what the central bank will do next, and may determine the British pound's next move.

The Bank of England is widely anticipated to follow up their October 8 and November 6 rate cuts with yet another aggressive reduction at 7:00 ET on December 4. As of November 26, a Bloomberg News poll shows that the majority of economists surveyed thought that the BOE would reduce the Bank Rate by either 50 or 100 basis points, with the consensus forecast calling for the latter. Likewise, Credit Suisse overnight index swaps are fully pricing in a 100 basis point cut, and it seems increasingly likely that the BOE will slash the Bank Rate to the lowest since 1939, when rates were at 2.00%.

The BOE’s upcoming decision will be just one of many efforts put forth in an attempt to prevent the UK economy from falling into a prolonged recession, as Chancellor of the Exchequer Alistair Darling downgraded growth forecasts during his pre-budget report on November 24 to 0.75 percent in 2008, between -0.75 and -1.25 percent in 2009, and between 1.5 to 2 percent in 2010. Chancellor Darling also announced a £20 billion fiscal stimulus plan, which calls for a cut to the Value Added Tax (VAT) to 15 percent from 17.5 percent, boosts to state pensions and child benefits, extensions of employment support, and a housing support package, among other things. In order to accommodate for some of these costs, Chancellor Darling said that after April 2011 those earning at least £150,000 a year would face an income tax of 45 percent.

How will the Markets Respond to the News? As we mentioned, the markets are betting on a 100 basis point reduction on Thursday, but they are also pricing in over 175 basis points worth of rate cuts within the next 12 months, which is part of the reason why the British pound has taken such a heavy hit versus the US dollar in recent months. If the BOE ends up cutting rates more than forecasted, the news could weigh heavily on the British pound and drive it down to or even below the November 13 low of 1.4557. However, as we saw with the Australian dollar and the Reserve Bank of Australia’s larger than expected 100 basis point cut on Monday, a currency can actually gain if the central bank suggests in their policy statement that they will leave rates unchanged.

Antonio Sousa is a Currency Analyst for FXCM.