The Bank of England Appears Dovish as its Rate Decision Looms
The Bank of England Appears Dovish as its Rate Decision Looms
By:Ilya Spivak
The U.S. dollar may rebound against the British pound as the Bank of England inches closer to interest rate cuts
- The U.S. dollar weakens as the Fed sticks to expecting three cuts in 2024.
- The Bank of England rate decision is up next, with a dovish tone in view.
- The British pound may turn lower from resistance against the U.S. dollar.
The Federal Reserve opted for minimal changes with its much-anticipated monetary policy announcement.
The target range for the benchmark Fed funds rate was held steady in the 5.25% to 5.50% range, and officials’ guesstimate for the path ahead continued to call for three 25-basis-point (bps) cuts in 2024. One expected rate cut was dropped from the 2025 projection, and the longer-run rate forecast was raised from 2.5% to 2.6%.
A slight rejigging of inflation expectations brought an upgrade of core price growth for 2024—excluding food and energy—from 2.4% to 2.6%. The headline reading for 2025 was nudged higher to 2.2% from 2.1%. Gross domestic product (GDP) growth was revised higher for 2024 (2.1% vs. the earlier 1.4%), 2025 (2.0% vs. 1.8% prior), 2026 (2.0% vs. 1.9% prior).
Wall Street welcomed the steady view on near-term interest rate cut expectations. Stocks rose alongside bonds and gold prices, while the U.S. dollar edged lower against its major counterparts. Bitcoin erased intraday losses for a modest gain.
Bank of England in focus as central bank marathon continues
The spotlight now turns to the Bank of England (BOE), which is lining up to bookend the slew of policy decisions from top-tier central banks this week. Another on-hold outcome is expected, with the Bank Rate steady at 5.25%. The first cut is due by August. 61bps in easing is priced in for 2024, putting the likelihood of a third reduction at 56%.
Consumer price index (CPI) inflation data released earlier this week showed a faster slowdown than expected. The headline year-on-year price growth rate rose 3.4%, the slowest since September 2021. Market-watchers were anticipating a slightly higher 3.5%. A BOE survey published last week showed inflation expectations are easing.
Data from Citigroup reveals that UK economic data has tended to undershoot baseline forecasts even after the economy bounced back from a shallow late-2023 recession since the beginning of this year. Job vacancies continue to fall—standing at the lowest since May 2021 as of January—and wage growth has eased back to the weakest since July 2022.
The British Pound may fall against the U.S. dollar
Taken together, this might make room for a bit of cautious optimism from BOE officials and help set the stage for easing later in the year. If this moves the voting tally on the nine-member monetary policy committee (MPC), trimming the number of votes for a hike from 2 to 1 or 0, the British Pound may face selling pressure.
The British pound is retesting support-turned-resistance just below the 1.28 figure after the Fed policy decision. Turning back lower from here eyes support near 1.2673, followed by a larger barrier in the 1.2504-37 zone. Alternatively, a push through resistance may set the stage for a test of the latest swing top just under the 1.29 figure.
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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