The Bank of England has recently made a 25 basis point rate cut, signaling some hawkish sentiment. The Monetary Policy Committee (MPC) faced a unique challenge, needing two votes to reach a 5-4 majority due to unexpected dissent among members. The Bank of England indicated that we might be approaching the end of the easing cycle, as lowering the Bank Rate has made monetary policy less restrictive. Although Governor Andrew Bailey’s press conference was not overly hawkish, changes in inflation forecasts and concerns about the job market offer reasons for the recent yield curve shift and the rise of the pound. Currently, there is only a 75% chance of another rate cut by the end of the year. The MPC discussed reducing quantitative tightening (QT), believing QT was responsible for adding 15-25 basis points to long-term yields, which supports the idea of a September reduction. Strong dissent within the MPC highlights the need to watch future inflation data closely. Clear evidence of moderation in inflation is needed to consider another rate cut in 2025. The pound remains strong, but fiscal challenges and the euro’s strength may limit movements in the EUR/GBP exchange rate, while the ability for GBP/USD to exceed 1.35 is still possible. The recent hawkish rate cut by the Bank of England shows a lot of uncertainty. The narrow 5-4 vote highlights a split within the committee regarding the path of inflation. This division means that any new data could significantly change expectations in the near future. It’s crucial to monitor upcoming inflation figures, especially after the July 2025 data showed the Consumer Price Index (CPI) stuck at 2.3%. Services inflation, at 4.5%, supports the hawkish committee members who opposed the cut. This suggests that reaching the 2% inflation goal is still uncertain. For interest rate derivatives, the current situation indicates that volatility may be underestimated. The market sees only a 75% chance of another rate cut this year, making it a good time for options strategies that profit from sharp movements in either direction. Selling short-dated sterling interest rate futures might be a cautious way to adjust for the Bank’s hesitance to ease further. The planned reduction in QT in September is another important event to watch. The Bank of England estimates that QT has contributed up to 25 basis points to long-term yields, so a slowdown should help boost gilt prices. This could lead to a steeper yield curve, making curve-steepener trades appealing. In currency markets, the strength of the pound seems to be holding. After the announcement, the GBP/USD exchange rate is testing the 1.3350 level, and we see a clear path toward the 1.35 target. The sharp currency fluctuations in 2024 remind us how quickly sentiment can change, so using options to manage risk while aiming for further gains in GBP/USD is advisable. However, we are more cautious about the pound’s performance against the euro. With the European Central Bank also taking a strong position, potential gains in the EUR/GBP pair may be limited. Thus, expressing a bullish view on the pound is best done against the US dollar.

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