GBP: Bank of England Cut Won’t Damage Pound’s Resilience

Key points:

• The Bank of England policy decision is due today, and the consensus is expecting a 25bps cut in the Bank Rate to 5.00%.
• While the balance of vote split remains vulnerable to a shift towards a rate cut, language will still likely remain hawkish given sustained services inflation pressures and a resilient economy.
• GBP could face near-term downside if a rate cut comes through, but could retail its resilience vs. other G10 FX as BOE’s rate cut cycle could be less aggressive than peers and economic resilience and political calmness are also at play.

The Bank of England policy decision is due today and consensus is expecting a 25bps cut in the Bank Rate to 5.00%. There has been an eerie silence from the BOE policymakers, which leaves the decision to be a coin-toss, with markets pricing in 60% odds of a rate cut today.

Two of the BOE’s rate-setters are already voting for cuts — Swati Dhingra and Deputy Governor Dave Ramsden. External rate-setters – Catherine Mann, Jonathan Haskel and Megan Greene – appear to be unlikely to back a cut yet. It leaves the decision hinging on four remaining internal rate-setters. Chief Economist Huw Pill has sounded relatively hawkish, signalling he may not join the rate cut camp in August.

Governor Andrew Bailey said before the pre-election blackout period that rate cuts could come before the Fed. He holds sway with other MPC internal members as well, particularly Sarah Breeden. Clare Lombardelli is the new MPC member replacing Ben Broadbent and may be bit of a wildcard. If she was to join the rate cut camp, that would make it 5-4 vote in favor of a cut. In summary, an August BOE rate cut still remains a possibility. The recent shift in Fed’s narrative, with Chair Powell keeping the door open for a September rate cut at the FOMC meeting yesterday may also give a realm of comfort to the BOE policymakers to proceed with a rate cut.

However, even if the BOE went ahead with a rate cut today, the language will likely be hawkish, because:

1. The UK economy still has a services inflation problem.
2. May employment report showed that labor market in the UK is cooling, but wage pressures remained evident with regular pay still up 5.7% YoY (down from 6% in April) and regular private pay up 5.6% YoY vs. BOE’s Q2 forecast of 5.2%.
3. Activity levels continue to rebound. Annualized GDP growth for the first quarter has risen to 0.7%, the highest since the fourth quarter of 2021 and higher than the BOE’s own forecast of 0.4%. Q2 growth indicators suggest that growth can overshoot BOE’s 0.2% projection (which may be revised higher today).

Impact on GBP

This means that the pace of rate cuts from the BOE is still expected to be slower than the Fed. This could keep the British pound supported, or a buy on dips. Beyond yield differentials, the sterling is also supported by growth resilience as well as the political calmness in the UK. This makes GBP a safe-haven and a preferred choice of carry amid turbulence in other parts of the world. GBPUSD sees a support at 1.28 although the fibo retracement level at 1.2868 needs to clear to extend the upside momentum. EURGBP could remain prone to more downside if the 50-DMA at 0.8454 continues to hold.