The Bank of England has cut interest rates by 0.25%, following a closely contested vote. At first, the decision makers were split, with one member pushing for a larger cut of 0.50%. However, a slim majority opted for the smaller cut, which led to the pound gaining value. Inflation remains a big concern, and it’s expected to rise to 4% by September 2025, which is twice the target. Bank of England Governor Andrew Bailey discussed the uncertainties in future monetary policies during a press conference. It’s unlikely that interest rates will increase soon, with attention now on when the next rate cut may happen. Because of inflation, a rate cut in September seems improbable, and even one in November could be uncertain right now. This uncertainty is currently supporting the pound. The recent rise in the pound serves as a key indicator for the upcoming weeks. The smaller-than-expected rate cut keeps UK assets appealing, which helps reinforce the currency for now. We should be cautious about making large bets against the pound until significant economic data is released. The main challenge is persistent inflation, which is anticipated to reach 4% by September. Recent data from July 2025 showed the Consumer Price Index (CPI) at 3.8%, leaving the Bank of England with little room for aggressive actions. Reflecting on the tough battle against inflation in 2022-2023, the Bank will be very reluctant to cut rates again while prices are rising. This division and uncertainty in the Bank’s leadership will likely contribute to market volatility. We expect that implied volatility in sterling options will remain high, especially leading up to the September and November policy meetings. This scenario could make strategies that benefit from price fluctuations, like purchasing straddles on the GBP/USD pair, more attractive than focusing on a single direction. For the UK stock market, the possibility of higher rates lasting longer may slow down the FTSE 100. Recent data showed a slight dip in UK retail sales for July, suggesting that corporate profits might struggle due to high borrowing costs and weaker consumer demand. We are considering using index put options to hedge against potential market weakness this autumn. It’s important to also look at the global context. The U.S. Federal Reserve and the European Central Bank are signaling that they will hold rates steady to address their inflation challenges. As central banks globally remain cautious, the pound’s potential to increase further against the dollar and euro may be limited.

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