As anticipated earlier this week, the Bank of England (BoE) implemented a slightly hawkish rate cut yesterday, leading to a limited negative reaction from the pound. The GBP/USD pair fell nearly 0.8%, reaching $1.2750 just before the announcement, its lowest point in over three weeks. However, it recovered during the press conference, climbing back above $1.28, almost to its starting level for the day.
The markets had priced in a 60% probability of a 25 basis point rate cut to 5%, and the BoE’s Monetary Policy Committee (MPC) voted 5-4 in favour of the cut. For the MPC members who shifted from holding to cutting, the minutes indicated that the decision was “finely balanced.” This suggests to traders that policymakers might adopt a cut-and-hold approach, similar to the ECB’s strategy. We don't anticipate another cut next month; currently, money markets are pricing the next cut for November, with a 50% chance of a third in December. Gilt yields fell to their lowest in over a year, but the pound remained resilient, bolstered by hawkish comments in the press conference warning of potential inflation risks. Inflation is expected to rise to 2.7% by year-end before decreasing from 2025 through 2027. Meanwhile, the UK's growth forecast has been upgraded to 1.25% for this year, more than double the BoE's May projection.
Consequently, the central bank will proceed cautiously with further cuts, focusing on reducing restrictiveness rather than easing. This approach explains the pound's limited reaction. Although the bullish positioning of GBP appears concerning in isolation, we remain cautious about turning too bearish on the pound, given that the BoE is not alone in cutting rates and the UK's economic outlook is improving.
