GBP/USD Forecast: Pound May Fall Despite No Surprise from the BOE
GBP/USD Forecast: Pound May Fall Despite No Surprise from the BOE
By:Ilya Spivak
A Bank of England rate cut is no big surprise, but the British pound may fall anyway
- The Bank of England (BOE) is widely expected to issue another 25bps rate cut.
- Policy bets have been quietly steady despite clashing growth, inflation trends.
- The British pound has struggled despite favorable BOE vs. Fed rate cut outlook.
While the Federal Reserve continues to dither on another round of interest rate cuts, across the Atlantic the Bank of England (BOE) is geared up to reduce borrowing costs by another 25 basis points (bps). The move has been priced into benchmark SONIA interest rate futures, showing markets are fully primed for the change.
At face value, the BOE seems to be in a challenging position. Leading purchasing managers index (PMI) data from S&P Global showed economic activity growth slowed in July. That follows gross domestic product (GDP) data showing that the economy contracted for a second consecutive month in May.
Markets see UK rates on autopilot despite clashing growth, inflation
Meanwhile, inflation is pushing higher. The latest consumer price index (CPI) data showed price growth accelerated to 3.6% year-on-year in June, the highest in 17 months. That seems to echo the very thing that the Fed has been worrying about vis-à-vis the impact of the Trump administration’s tariff policies: a “stagflation”-flavored policy trap.
Nevertheless, BOE rate expectations have been remarkably stable. SONIA pricing points to minimal changes in traders’ priced-in outlook in recent months, implying that markets have resigned to a sense of “autopilot” for where Governor Bailey and the steering Monetary Policy Committee (MPC) are steering.
The UK central bank has been cutting rates since mid-2024, bringing the target Bank Rate down from 5.25% to 4.25% by May of this year. That 100bps reduction brings the BOE up to speed with last year’s jumbo dose of Fed stimulus. Chair Powell and company cut rates by 100bps between September and the end of 2024.
The British pound may fall if the BOE delivers a status quo result
This week’s BOE move to 4% will mark a step ahead of its US counterpart. From there, markets price in a further 25bps cut before year-end and another one in 2026. Meanwhile, Fed Funds futures are priced for 55bps in cuts in 2025 and 68bps in further easing next year, putting US officials on pace to “out-dove” their UK peers.
Remarkably, the British pound has still sold off against the US dollar since prices peaked in July. The UK unit is trading down 3.4%, having fallen as much as 4.7%. This inability to make good on a supportive rates backdrop hints at underlying weakness that may be reasserted if a status quo BOE result takes immediate event risk off the table.
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Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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