The UK yield curve has disinverted for the first time since May 2023 and is expected to steepen further as traders anticipate the Bank of England (BoE) will soon start cutting interest rates, with more reductions likely over the next year. Recently, sterling has been influenced by broader market sentiment, dropping below $1.29 against the US dollar last week. The focus now shifts to the BoE meeting this Thursday to see if the pound can make another attempt at $1.30.

The decision on whether the BoE will cut rates this week remains uncertain. Expectations for a rate cut increased significantly after the June meeting, where policymakers revealed that the decision to hold rates was “finely balanced,” with two members voting for a cut. Since then, a new government has taken office, and the latest PMI readings indicate that cost pressures are easing, driven by decreasing output prices in the services sector, which has been a significant contributor to consumer inflation. Despite slight increases in services inflation and private sector wages, along with strong survey results, we believe the market may be underestimating the likelihood of a rate cut this Thursday. This could expose the pound to short-term downside risk.

Nevertheless, the stronger UK economic recovery, improving consumer confidence, and the UK’s renewed engagement with the EU are all positive factors for the pound. As a result, our long-term outlook for GBP remains bullish.