Goldman Sachs has updated its expectations for the Bank of England. They now predict rate cuts will begin in November and continue until March next year. Previously, a 25 basis point cut was anticipated at the end of September. The new forecast indicates that the bank rate will eventually settle at 3%. This follows their expectations of a rate drop for the upcoming month.

Revised Forecast And Trade Implications

Given the latest predictions from Sachs, we think traders should adjust their strategies for a longer and more gradual rate-cutting cycle in the UK than once thought. This new view suggests that derivative prices reflecting a sudden, major cut may not be accurate. We should change our positions to account for a series of smaller cuts starting later this year. The credibility of this shift is supported by recent data showing that UK inflation hit the central bank’s 2.0% target in May for the first time in nearly three years. This allows the Monetary Policy Committee to concentrate on boosting a weak economy. This important data makes bearish positions, like receiving fixed rates on swaps maturing next year, seem more favorable. Internal discussions at the bank reinforce this view, as the June policy vote was split 7-2, with members like Dhingra and Ramsden already advocating for a cut. This division shows that the agreement to maintain rates is weakening. Therefore, we see value in using options on SONIA futures to prepare for lower rates into early 2025.

Monetary Easing And Economic Implications

The overall economic situation, with UK GDP showing no growth in April 2024, creates a strong case for monetary easing. This stagnation makes it more likely the committee will act to encourage growth once it is sure inflation is sustainably at target. This strengthens the argument for strategies that benefit from lower borrowing costs. Historically, ongoing rate cuts have led to a weaker British Pound. For instance, during the aggressive easing from 2008 to 2009, the pound fell over 25% against the US dollar. We should consider strategies that expect sterling to weaken, such as buying put options on the GBP/USD currency pair. On the other hand, lower interest rates typically boost equities by reducing corporate borrowing costs. This outlook could benefit UK stocks, which have already seen the FTSE 100 hit record highs this year. We can take advantage of this by purchasing call options on the UK’s main stock index. Create your live VT Markets account and start trading now.

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