Bank of England to hike ratesOdds of GBP declines elevated: TD SecuritiesPound to Euro rate @ 1.1825Pound to Dollar rate @ 1.2550

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Pound Sterling is under selling pressure just hours before the Bank of England is set to announce another interest rate rise and potentially reveal plans to begin quantitative tightening, the process where it sells some of those bonds purchased under quantitative easing.

The Pound rallied overnight in the wake of the Federal Reserve's decision to raise interest rates 50 basis points but is this morning giving back those gains, meanwhile losses against the Euro of 0.45% are recorded and losses against most other major currencies are also noted.

The price action underscores the negative sentiment towards Sterling in the current environment which is also reflected by most analysts we follow continuing to hold a negative stance on the UK currency heading into the mid day announcement at the Bank of England.

The base-case scenario held by markets is that a rate hike of 25 basis points is to be announced, with some members of the Bank's Monetary Policy Committee voting for a more aggressive 50 basis point or no change at all.

If enough vote for a 50 basis point hike and it is ultimately delivered the British Pound would likely rise in response to the surprise.

However, such an outcome is deemed highly unlikely by the majority of analysts we follow who are largely of the view risks remain tilted lower for the Pound given the Bank's concerns of a slowing UK economy.

James Rossiter, Head of Global Macro Strategy at TD Securities, says the Bank will likely raise Bank Rate by 25 basis points but with one member of the MPC opting to keep rates unchanged.

He expects the language concerning guidance on further rate hikes to be left unchanged, such that "some further modest tightening may be appropriate ... but there are risks on both sides".

Under the base case scenario the Bank is also anticipated to remain data-dependent to allow for some optionality for June and beyond.

Crucially, Rossiter expects inflation forecasts to be upgraded sharply this year, but for downside revisions to be made for years two to three.

This outcome is assigned a 60% probability and the Pound is seen edging lower by a marginal amount.

But he sees a 25% probability the Bank delivers a "very dovish" hike, which results in a more notable -0.50% move lower in Sterling. (Set your FX rate alert here).

Here Bank Rate is hiked by 25 basis points but two or three MPC members vote to hold rates.

This would signal the odds are rising that rates are left on hold in June and this would prompt the market to bring down its hiking expectations, which could offer a mechanical drawdown on Pound exchange rates.

Under this scenario guidance would be changed to say that "the current stance of monetary policy is appropriate", with some emphasis on data dependency (but a bias toward no further hikes).

Above: Market implied interest rate expectations held by investors. Source: Goldman Sachs.

TD Securities do see a scenario whereby the Pound rallies, but ascribe a mere 15% chance of such an outcome.

Here the Bank of England would vote unanimously to raise rates by 25 basis points, which tees up a subsequent hike in June.

Language is left unchanged with the MPC saying that "some further modest tightening may be appropriate".

Rossiter would expect the tone of the MPR and press conference to suggest at least another two rate hikes are likely this year.

The crucial inflation forecast for the medium-term (2-3 years ahead) would be revised higher or left unchanged, suggesting scope for further hikes.

A framework for active Gilt sales would also be published and the MPC indicates they plan to start selling by August, says Rossiter.

Under this hawkish scenario the Pound would be expected to rise in the region of 0.35%.