A BOE Rate Cut Signal Would Send the GBP Crashing Down

The Bank of England will hold its meeting shortly, which will close the central bank fiasco of the last two weeks. All of them held interest rates unchanged as expected, so right now markets are concentrated on when the monetary easing will start. The BOE has been sounding hawkish recently, pushing back against rate cuts, which has been keeping the GBP supported, but a shift in rhetoric would send the GBP crashing lower.

Mixed Economic Figures from the UK

The British economy has voided a technical recession so far, exceeding predictions, however, GDP flatlined in Q3 of 2023, and many experts predict a recession. On the other hand, this week we saw a jump in services and manufacturing PMI above 50 points, which means that both sectors our out of contraction.

Inflation has also been showing some sticky signs recently. In December, UK headline CPI (consumer price index) unexpectedly rose to 4%, although it was on the back of higher costs for alcohol and tobacco, while the core CPI remained steady at 5.1% which is very high. The recent increase in consumer prices last month has eased expectations for the BOE to deliver a rate decrease in the first half of the year.

Markets Will Scrutinize Any Bank of England Hint

The odds of a March rate cut have gone down to 16% now. Despite the bank’s continuous resistance to rate reduction, markets are already pricing in 100 basis points of rate cuts this year, implying four 25 basis point cuts from June until December. The BOE has declined to comment on rate cuts, but with the UK economy being in a vulnerable state and markets expecting four cuts in 2024, he may feel compelled to provide further information, or at least appear open to the possibility of rate cuts, which forex traders will likely scrutinize.

MPC Member Vote Split

In the December meeting, the Monetary Policy Committee voted 6-3 in favor of maintaining the current interest rates at 5.25%, with Catherine Mann, Megan Greene, and Jonathan Haskel advocating for an increase. Now, expectations are for a 7-2 vote, predicting that at least one of those hawks will scale back and vote or the status quo with the majority. However, any MPC vote in favor of a rate cut at today’s meeting would increase the likelihood of a decrease at subsequent BOE meetings, which will be seen as dovish for the GBP, sending GBP/USD lower. The scope of the move though will be decided by the outcome, so we will follow this meeting on our forex calendar section.

GBP/USD Live Chart