The Bank of England has decided to keep interest rates steady with a vote outcome of 6–3. This has raised expectations for an interest rate cut likely in August, especially since the governor often supports the majority’s views. In its recent statement, the Bank noted weak growth and a cooling labor market. Economists had already predicted a rate cut in August, and this decision reinforces that expectation.

Interest Rate Cuts Expected

We expect gradual interest rate cuts, but stronger cuts could be on the table given the recent weak data. This outlook is not encouraging for the pound’s future strength. All statements carry risks and are meant for informational purposes only. Make decisions based on comprehensive research, as investing involves the possibility of losses. The views shared here are personal opinions and may not be accurate or timely. The Bank of England holding the base rate steady, in light of growing economic concerns, suggests a cautious approach rather than hesitance. The 6–3 vote could indicate a policy change in the near future. Since the governor usually aligns with the majority, August could see a shift. Reviewing the Monetary Policy Committee’s statement reveals a clear message: growth is weak. The labor market, once resilient after the pandemic, is beginning to show signs of strain. While inflation pressures remain in some areas, they no longer require aggressive measures. Lower energy costs and declining food prices may support the ongoing disinflation trend. For those tracking how expected rate changes can affect short-term volatility, the path ahead is narrow. The market is already pricing in a strong chance of at least one rate cut before summer ends. This means rates may drift lower unless unexpected data emerges. If employment numbers or wage growth outperform expectations, the easing outlook might shift quickly.

Sterling Under Pressure

At the same time, the pound is showing signs of pressure. Its movement now depends more on interest rate differences than overall economic strength. Even a small cycle of rate cuts could contribute to this shift, especially when compared to the Fed’s more responsive approach to data. We need to closely watch how different assets react, particularly how rate futures change in relation to the dollar and euro. For strategic positioning, we see the current scenario favoring flattening across mid-curve instruments, especially around the August and November contracts. The risk-reward for steepening has decreased unless a surprising rise in CPI shifts opinions abruptly, which has yet to happen. We expect volatility to remain low in the short term, but there is still potential sensitivity to wage data and revised GDP figures, meaning unexpected outcomes are possible. Additionally, the changing make-up of the MPC should not be overlooked. The recent addition of more dovish members increases the likelihood of further shifting votes after a few soft economic reports. Overall, we anticipate that positioning will need to adapt to how quickly the BoE’s messaging changes from patient to active. Sticking with tight strike selections, avoiding excessive convexity, and paying close attention to wording in upcoming speeches will be crucial as we move through August. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now