Interest rate decisions from the European Central Bank and the Bank of England headline the economic calendar. While any significant changes in the key elements of monetary policy are unlikely in both cases, the outcomes may still prove to stoke significant volatility around currency markets.

The BOE is expected to deliver the first policy announcement since the government unveiled an ambitious emergency budget that promised to slash the deficit by 6.3 percent of GDP by 2014-15. The central bank’s statement (or lack thereof) will be closely scrutinized for its take on the merits of the ruling coalition’s plans and their feasibility.

On balance, the embrace of austerity is likely to have dire implications for economic growth considering government spending has outpaced private demand since early 2008, hinting that Mervyn King and company may need to introduce yet more support to prevent a backslide into recession. That said, a willingness to proactively deal with the fiscal shortfall (particularly if it is endorsed by the BOE) may boost the British Pound in the near term despite the possibility of further easing down the road as traders size up UK policymakers against their counterparts in continental Europe and the US.

GBP/USD sharp fall intensified its downward speed recently. After peaking very briefly at 1.5240 (new 2-month high) and 1.2029 against the Euro, the GBP/USD and GBP/EUR pair is on a downhill journey after the British currency eliminated more than 100 pips and all its yesterday’s gains. At present, the pair trades at 1.5130 against the USD and 1.1955 against the Euro.

Looking at this mornings data releases – better than expected data (Industrial production) in the UK earlier this morning failed to buoy its domestic currency, which was simply overwhelmed as the vast majority of the market came in with one goal in mind, that is, move Sterling away from the highs.

With both central banks meeting today and with the estimate of UK GDP out this afternoon markets are advised to remain particularly cautious and equally consider short / medium terms requirements as Sterling continues to retrace its gains.

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Tom Trevorrow is a senior analyst and currency trader at Tor FX assisting private and corporate clients internationally with their currency transfers.

You can email tom.trevorrow@torfx.com with any questions or for his opinion on the FX markets or call him direct +44 (0) 1736 335264