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FX Primer: Bank of England to cut but limited sterling downside?

Forex 3 minutes to read
Neil Wilson
Neil Wilson

Investor Content Strategist

FX Primer: Bank of England but limited sterling downside?

Key Points

  • Bank of England is widely anticipated to cut rates on Thursday from 4.25% to 4.0%
  • But it’s a complex decision against a backdrop of sticky inflation, lacklustre growth, a struggling labour market and expected tax hikes in the autumn
  • A three-way split among members of the rate-setting Monetary Policy Committee (MPC) could muddy the market view of the future path of rates and sterling

The Bank of England is widely anticipated to cut rates on Thursday from 4.25% to 4.0%.

But it’s a complex decision against a backdrop of sticky inflation, lacklustre growth, a struggling labour market and expected tax hikes in the autumn.

We could see a three-way split among members of the rate-setting Monetary Policy Committee (MPC), with some voting to cut more and one perhaps opting to hold. I wouldn’t read too much into a split as it’s not very often a great signal of future policy and rather reflects a lack of consensus on what remedy is needed in the here and now.

Unemployment has risen above the Bank’s forecasts and growth is weaker. Latest data for June showed the unemployment rate rose to 4.7% in the three months to May, the highest level since June 2021.

But services inflation, a key one for the BoE, remains stubbornly high at 4.7%. That is above even the quite level expected by the BoE coming into the autumn. Headline inflation has also ticked up to 3.6% but the BoE was anticipating inflation to pick up through the year.

Governor Andrew Bailey gave a strong signal to the market two weeks ago by saying that he believes “the path is downward” on rates. Projections are likely to show a slightly firmer path for inflation as it exceeded the Bank’s forecasts, although medium-term forecasts are unlikely to change.

On the whole, while I favour the Federal Reserve seeing inflation further away from target than employment, the Bank of England is on the other side with the labour market and slowing growth the key concerns. It’s also no doubt fully away that tax hikes are coming, which will further squeeze the economy, jobs and spending power.

GBPUSD

Considerable downward momentum since the 1 July peak at 1.3750 has resulted in a significant pullback to the 12 May low at 1.3140 where we had a strong bounce and recovery on Thu/Fri last week. This area is the key support for bulls to hold onto as it sits on or around the 61.8% retracement of the Apr-Jul rally at 1.3120 and the 38.2% retracement of the YTD rally from the Jan lows to July peak at 1.3160 area.

Near term momentum seems to be fading a touch with Monday’s peak around 1.3330 failing to hold, albeit we are seeing range-bound action around the 50% retracement of the Apr-Jul rally. Monday’s high needs to be cleared for bulls to reassert control but we await potentially a more dovish-sounding Bank of England before we get more clarity.

 

 

GBPUSD 6 Aug
Source: Saxo
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