BOE Braces for More Easing?

The BOE is widely expected to cut interest rates at its upcoming meeting as part of an acceleration towards easing while the British economy struggles to gain traction amid trade uncertainty.

Picking Up the Pace

Among major central banks that started their easing cycles last year, the BOE was viewed as the most reluctant, with Britain facing high inflation and hopes of a potential economic rebound. However, signs of resilience have been fading, with rates not seen since late 2022. Despite largely avoiding major US tariffs, trade tensions continue to be a challenge for the UK economy. Although inflation remains above target, it is broadly expected to keep falling, potentially creating a different issue for policymakers if it falls too much.

After a few MPC members suggested the , economists and markets have increased their odds of easing. This week's rate cut is expected to be the first of four more cuts this year, with markets pricing in three cuts over the course of the next four meetings. BOE Governor Andrew Bailey warned recently of slowing growth but also tried to reassure markets that a recession is not a likely scenario.

The Currency Moves into Position

Unsurprisingly, the pound has struggled as markets price in more rate cuts than previously anticipated, losing ground against the euro. However, the dollar has also struggled, which has prevented cable from fully reversing its earlier gains seen in April. Markets are pricing in an orderly decline in interest rates over several months. However, some economists argue that a larger rate cut is possible, . At least one vote for this option is likely, after MPC member Catherine Mann argued a couple of months ago that the BOE should make larger moves to ensure the impact of policy gets transmitted.

With markets expecting further rate cuts, between those favouring a 25 basis point cut and those arguing for a 50 basis point cut. A "three-way split", with votes in favour of holding rates, might shake up markets, as it could be interpreted as a sign of unexpected hawkishness. A large margin supporting a larger cut would logically increase expectations of easing at the next meeting, potentially weighing on the pound.

Triangle Paves Way for Cable Declines?

Cable appears to be nearing the end of a running triangle pattern, which is expected to decline in the short term to the 61.8% Fibonacci retracement of the 1.3260-1.3402 upward leg, sitting around 1.3316. Only losing the regional support might expose the pair to lower levels, with support seen at 1.3233 and 1.32. On the upside, breaking higher before reaching the golden pocket would suggest a complete pennant pattern instead, opening the door to 1.3424 and the peak of 1.3445.

Source: SpreadEX / GBPUSD

Key Takeaways

With the BOE expected to cut at its upcoming meeting and speculation increasing about accelerating its easing efforts amid trade uncertainty, the focus will be on the extent of the rate cut and the vote split. On the one hand, markets expect an orderly decline in rates over several months. On the other hand, some economists point to a larger cut, perhaps even a 50 bps. As such, the pound's performance might hinge on the bank's policy stance, with a larger-than-expected cut or a hawkish "three-way split" vote offering directional bias for the currency's trajectory.