The Chief Economist of the Bank of England, Huw Pill, stressed that we should rethink how sustainable recent interest rate cuts are if there’s a shift in how prices and wages are set. We are seeing ongoing disinflation, with the Monetary Policy Committee believing that UK monetary policy is still strict.

Shift In Inflation Risks

There are new inflation risks, with expectations increasing for the next 2-3 years. This could spill over into longer-lasting inflation. A weaker job market balances this out, but we need to keep an eye on external influences affecting domestic prices. These comments scored 7.2 on the hawkish scale. Despite this, the GBP/USD stayed unchanged, trading at 1.3440 by day’s end. The Bank of England changes its monetary policy to keep prices stable, which impacts interest rates and the value of the Pound. High inflation leads the Bank to raise rates, which supports the Pound, while low inflation may prompt rate cuts. Quantitative Easing weakens the Pound, but Quantitative Tightening strengthens it as the economy gains momentum. It’s clear that the pace of interest rate cuts might slow. Recent data from July 2025 showed headline inflation dropped to 2.1%, but steady wage growth at 4.0% makes the Bank cautious. This indicates that the Bank of England is concerned that inflation could return, even as the economy slows down. For now, the currency market seems to overlook this, with the pound remaining steady around 1.3440 against the dollar. This disconnect might create chances for options traders, as the implied volatility on the pound might be undervalued. We believe it may be wise to prepare for future price changes rather than focus on a specific direction in the weeks ahead.

Warning For Interest Rate Derivatives Traders

This is a clear warning for those trading interest rate derivatives. Expectations for quick rate cuts, which seemed likely just a few months ago, might now be too optimistic. It may be time to revisit positions depending on aggressive rate cuts by the Bank through the end of the year. Looking back, the memories of high inflation in 2022 and 2023 make the Bank cautious about any signs of rising prices. That period showed how quickly inflation can spiral out of control, explaining the current focus on how prices are set. This history supports the idea that the Bank will be careful, even with a weaker job market. The key takeaway for the upcoming weeks is that the market may be underestimating the risk of a more hawkish Bank of England. The soft job market, with unemployment recently rising to 4.5% in July 2025, keeps traders relaxed. We will closely monitor the next inflation and job reports before making any major moves. Create your live VT Markets account and start trading now.

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