We had the Bank of England today, and while the market sees them as hawkish, the GBP now looks set for a big decline – logic of our view and the key technical levels to look out for below.
Bank Of England Cut Interest Rates
We had the Bank of England today, and the market view is that the decision was hawkish, but the GBP has failed to rally, and we expect a big correction to the downside. The Bank of England voted 5–4 to cut Bank Rate by 25bps to 4.25% in May as expected. Two members wanted a larger cut to 4%, while two wanted to hold at 4.5%. Traders are pricing in two more cuts this year, with a third cut standing at odds of 40 per cent. The possibility of three interest rate cuts following the May decision previously stood at 80 per cent.
The market is taking the BoE as more hawkish due to the divide within the MPC as a 5-4 decision in favour of a 25 basis point cut exposed some of the differences in opinion among rate-setters. External members Swati Dhingra and Alan Taylor voted for 50 basis point cuts; chief economist Huw Pill and Catherine Mann, who voted for 50 basis point interest rate cuts in February, voted to hold rates.
Goldman Sachs economists Sven Jari Stehn and James Moberly were bemused by the Bank’s decision to stick to its “gradual and careful” approach to rate-cutting, as they said the minutes were “hawkish.” They highlighted how members who voted for a rate cut had done so for different reasons. “The minutes noted that ‘most’ of the five members who voted for a 25 basis point cut had, before the latest global news [on a UK-US trade deal], viewed the May decision as ‘finely balanced’ between no change and a cut,”
“That said, the minutes did indicate that for other members in that group, the case for a cut had been ‘fairly clear’ even before the latest global developments. “Those who voted for a hold noted the decline in short-end market interest rates since the March meeting. The two members who voted for a larger cut argued that a continued policy stance that was ‘too restrictive’ risked opening up ‘an unduly large output gap’ and inflation deviating from target on a sustained basis.”
Another view of the meeting - Capital Economics’ Ruth Gregory noted that a rate of just 3.75 per cent was likely by the end of the year. “The MPC implied it is less inclined to slow the pace of rate cuts than it was in March, but it did not send a strong signal that it will speed up,” She concluded “What’s clear is that market expectations of three rate cuts, taking Bank Rate to 3.5 per cent by the end of this year, is a step too far, although rates may get there or below eventually.”
What's interesting is the GBP did not move much to the upside on the data and fell back from today's highs – perceived good news didn't send it higher, and the GBP is overbought, we think it will fall back to the downside.
Also, our view of the vote split shows a clueless Bank of England! But they will all become focused on rate cuts as the UK economy moves towards recession. The much vaunted UK-US trade deal is also bearish for the GBP.
UK-US Trade Deal Bullish the USD
We did have a US UK trade deal but thats bullish the USD NOT the GBP: U.S. President Donald Trump and British Prime Minister Keir Starmer on Thursday announced a "breakthrough deak" on trade that leaves in place a 10% tariff on goods imported from the UK while Britain agreed to lower its tariffs to 1.8% from 5.1% and provide greater access to U.S. goods. This is bullish for the USD as a deal is done, but the US gets more than the UK.
Other countries look likely to strike deals with the US, and again, they will be in favor of the US. We still think a big trade war will be avoided. Keep in mind that trade wars escalating have been a main driver of USD weakness. Our view is that the highs are in and GBP/USD will move lower.
Technical Analysis
Our view of the key levels of support and resistance below.
