Bank of England nearing decision to cut rates

Odds for a rate cut by the Bank of England remain divided.
UK disinflationary pressure stalled in June.
GBP/USD appears to be supported so far by 1.2800 region.

Consensus among market participants appears pretty divided around the imminent interest rate decision by the Bank of England (BoE) arriving on Thursday. It is worth recalling that the central bank maintained its policy rate unchanged at 5.25% in the last seven meetings, although renewed repricing by investors seems to favour a potential 25 bps rate cut this week.

The BoE’s MPC vote is expected to be a close call

The Bank of England's policy decision is expected to be a close call, while market pricing is now signalling a 63% probability for a quarter-point cut, and the Monetary Policy Committee (MPC) vote could come as close as 5-4 in favouring a reduction of the central bank’s rate.

Let’s remember that at the June gathering, the MPC decided to keep rates unchanged with a 7-2 vote. However, those who voted to hold rates indicated that their decision was “finely balanced," hinting at the idea that a rate cut could be in the offing.

Disinflationary pressure seems to have hit a wall in June after the headline Consumer Price Index (CPI) rose by 2.0% over the previous 12 months, matching May’s reading. The core CPI, which excludes food and energy costs, also matched the previous month’s prints, advancing by 3.5%.

In the same line, service inflation rose by 5.7% YoY from a year earlier and remains quite above the central bank’s 5.1% projection.

Still around inflation, the BoE’s Chief Economist, Huw Pill, argued that the bank was nearing a decision to cut interest rates, though service price inflation and wage growth remained troublingly high. It is worth noting that Pill joined the majority of his colleagues in June in voting to keep interest rates at 5.25%.

Her colleague Catherine Mann emphasized the strong price pressure in the UK economy, signalling that she is unlikely to support an interest rate cut in August. Mann added that the recent drop in domestic inflation was merely "touch and go" and predicted that inflation would likely exceed that rate for the remainder of the year.

Favouring a rate cut this week, Rabobank’s Senior Macro Strategist Stefan Koopman said, “We anticipate a 25bp cut to the Bank rate, bringing it to 5.00%, marking the start of a gradual easing cycle with 25bp cuts each quarter. However, there is a risk that officials may want to see another month of data first.”

Additionally, analysts at TD Securities argued, “We expect a 25bps cut at the August MPC meeting, with a narrow 5-4 vote. That said, uncertainty is high, not only due to sticky service inflation prints but also due to compositional changes on the committee. The message will likely be a cautious one, as the MPC should not want to signal consecutive cuts at this stage.”

How will the BoE interest rate decision impact GBP/USD?

Despite disinflationary pressures losing momentum in June, market participants seem to lean toward a rate cut at the BoE’s monetary policy meeting on August 1 at 11 GMT.

FXStreet Senior Analyst Pablo Piovano sees the British Pound coming under renewed downside pressure in the event of a rate cut, as such a scenario is only partially supported by market forecasts.

Pablo adds that the GBP/USD rally experienced in the first half of July that lifted Cable to fresh 2024 peaks near 1.3050 was almost exclusively on the back of accelerated weakness in the US Dollar (USD) following investors’ repricing of a rate cut by the Federal Reserve (Fed) in September.

Against that backdrop, extra losses could motivate GBP/USD to break below the weekly low of 1.2806 (July 29) and challenge the provisional support at the 55-day and 100-day SMAs at 1.2776 and 1.2682, respectively. The breach of that region exposes a probable slide to the July low of 1.2615 (July 2), which appears reinforced by the proximity of the key 200-day SMA (1.2836).

On the upside, Pablo sees the initial stop for bulls at the 2024 peak of 1.3044 (July 17).

Economic Indicator

BoE Minutes

The minutes of the Bank of England (BoE) Monetary Policy Committee (MPC) meetings are published alongside the committee decision. The minutes give a full account of the policy discussion, including differences of view among members. They also record the votes of each member of the MPC. Generally speaking, if the BoE is hawkish about the inflationary outlook for the economy, then the markets see a higher possibility of a rate increase, and that is positive for the GBP.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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