The British pound is currently stronger against the US dollar but weaker compared to the euro. Stagflation challenges in the UK may cause the GBP to drop further against the euro. The Bank of England (BoE) is expected to lower its policy rate by 25 basis points to 4.00%. This move shows a cautious approach to future rate changes. Even though the UK’s real GDP shrank in April and May, high inflation may keep the BoE from making big policy shifts.

Monetary Policy Committee Dynamics

In a recent meeting, the Monetary Policy Committee voted 6-3 to keep interest rates steady, with some members suggesting a 25 basis point cut. Predictions indicate possible disagreement among members about rate cuts, maintaining rates, or even a 50 basis point cut, influencing the BoE’s easing plans. The upcoming Monetary Policy Report will provide updated economic forecasts and examine the previous year’s quantitative tightening. The BoE plans to reduce its gilt holdings by £100 billion between October 2024 and September 2025. Maintaining this pace of gilt sales could push long-term yields higher, as it would mean selling a large £51 billion in gilts. The stagflation risk in the UK poses challenges for the pound against the euro. The European Central Bank is keeping rates steady due to its own inflation issues, which may lead to a further decline in the GBP/EUR pair. This situation is noteworthy, as the BoE is likely easing policies while the European bank is more cautious. We expect the Bank of England to implement a 25 basis point rate cut, but there’s uncertainty about their future guidance. The anticipated disagreements within the Monetary Policy Committee may lead to greater volatility in the pound. Strategies that profit from significant price movements may be beneficial around the next policy announcement.

UK Economic Data and Gilt Market

Recent economic data reveals a contraction in April and May, affecting the outlook. Although June showed a slight improvement, July’s inflation rate was still high at 3.1%, well above the 2% target. This data highlights the BoE’s tough choice between supporting weak growth and combating persistent inflation. We are closely monitoring the UK gilt market as the Bank of England continues its £100 billion quantitative tightening program through September 2025. Selling gilts may lead to higher long-term borrowing costs, and we have already noticed a rise in 10-year gilt yields in anticipation. This mirrors market reactions from the 2022-2023 tightening cycle, creating chances for higher yields. While the pound has been strong against the dollar, this could be temporary. The US Federal Reserve appears stable, supported by a resilient economy and strong labor market data from July. If the BoE cuts rates while the Fed maintains its stance, the GBP/USD exchange rate may face downward pressure. Create your live VT Markets account and start trading now.

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