GBP/USD has been strong but we expect this to end shortly and we have the Bank of England this week who we expect to be more dovish than the market is expecting...
The USD is oversold against all major currencies, and one of the strongest currencies recently against the USD is the GBP, supported by a good yield due to high interest rate,s which we think could be about to end...
Bank of England to Cut Rates by 25bps - Focus on the Growth Forecasts and Statement
We have the Bank of England on Thursday, and (BoE) may lower its inflation and growth forecasts and remove the reference to 'gradual' interest rate cuts from its statement. Growth indicators have been mixed recently and policymakers have repeatedly stressed that US tariffs could have a disinflationary effect in the UK.
The main focus we think will be on the extent of the downgrades to forecasts. The BoE has been quite aggressive in revising its forecasts in both directions in recent months and we could see the same again on Thursday. We expect significant downgrades and flaster rate cuts than the market expects.
“There is still data that argues against faster rate cuts. Wages continue to rise strongly, and services inflation is still very high. This is unlikely to change much even if Chinese goods become more widely available in Europe. And it was clear a few months ago that UK growth would not be spectacular in the months ahead. Recently, however, the figures have been quite strong again as the UK has benefited from the front-loading of US companies and consumers."...
“Now, this does not necessarily mean a complete turnaround, leading to speculation of an imminent 50bp rate cut. The BoE may lower its growth and inflation forecasts, while at the same time, as in February, there might be seven votes in favour of a 25bp cut, with two dissenting votes for a larger move. Although it is difficult to predict, given the rather fickle nature of the BoE, such a scenario seems to me the most likely at the moment. However, the risks are tilted towards a more dovish BoE, which would certainly be problematic for the pound." (COMMERZBANK)
Another view of the meeting, which we agree with: "What is perhaps more significant for a UK economy highly (negatively) geared to the gas price is that the 2025 natural gas curve is now 20% lower than the level conditioned for the last inflation forecast back in February. This, lower oil prices, and a stronger GBPUSD all tee up a considerably more dovish Monetary Policy Report," (Simon French, Chief Economist & Head of Research at Panmure Liberum.)
UK Economy Stagnant and Tax Hikes and Government Spending Cuts Likely
We have had front-loading in terms of tariffs, but this will en,d and the bigger picture in terms of the UK is an economy which is struggling. Borrowing reached £152BN in the year to March, up £21BN from the year before, and much higher than the £137BN predicted by the Office for Budget Responsibility, the government's official forecaster. The deterioration in the figures means that unless UK economic growth rebounds significantly, Chancellor Rachel Reeves will need to raise taxes and/or cut spending again in the Autumn.
"UK public borrowing is running out of control," (Andrew Sentance, an independent business economist and former member of the Bank of England's Monetary Policy Committee.) "The Chancellor has presided over a massive surge in spending/borrowing since July. Shocking!" he concluded. Another tax rise and cuts to Government spending look likely, which will weigh on economic activity. We think the Bank of England will move faster than the market expects to cut rates to support the economy.
We think the odds favor a more dovish BoE than expected, which could trigger a major sell off in terms of GBP/USD.
Technical Analysis
Our view of the key levels of support and resistance to look out for on the chart below.
