The Bank of England (BoE) has lowered its Bank Rate by 25 basis points to 4%, causing an increase in the Pound’s value. However, this decision sparked disagreement within the monetary policy committee, where four members wanted to keep rates steady. The BoE mentioned that inflation might rise temporarily due to energy and food prices, with potential further increases expected next month. Still, they believe long-term pressures will align with their 2% inflation target. Even with high US tariffs, reduced trade uncertainties should slightly improve global demand.

Sterling’s Broad Appreciation

Following the BoE’s decision, the value of the Pound rose broadly, pushing the EUR/GBP lower from 0.8740 to below 0.8700. Overall, the pair remains volatile, fluctuating between 0.8600 and 0.8750 after increasing from a low of 0.8355 in May. The BoE reviews its interest rate at each of its eight annual meetings, typically resulting in a hawkish stance that strengthens the Pound. The nine-member Monetary Policy Committee sets the interest rate to meet the BoE’s inflation goals. The current rate is 4%, which matches the Consensus but is lower than the Previous rate of 4.25%. Considering the Bank of England’s decision, we view the rate cut to 4% as a “hawkish cut,” given the significant dissent. The Pound’s immediate strength indicates that the market recognizes the uncertainty around future rate cuts, as four out of nine members wanted to keep rates unchanged. This division suggests that upcoming policy decisions will be debated and depend heavily on data. Recent inflation data further supports the dissenters’ caution and complicates our outlook. The Office for National Statistics reported that the Consumer Price Index (CPI) for July 2025 unexpectedly rose to 3.2%, driven by ongoing core service price pressures. This persistence in inflation, significantly above the 2% target, makes short-term rate cuts less likely and could support the Pound.

Strategies for Traders

For traders focusing on currency pairs, the EUR/GBP decline below 0.8700 is noteworthy. The pair has been unpredictable since it climbed from a low of 0.8355 in May 2025. With the BoE appearing more hawkish compared to the European Central Bank, we expect a possible test of the lower end of the recent 0.8600-0.8750 range. This uncertainty in policy signals likely increased volatility in the upcoming weeks. We anticipate that implied volatility on sterling options will rise as the market speculates on the BoE’s next move before their September meeting. Traders should prepare for larger price fluctuations in the Pound. Given this situation, we recommend considering strategies that capitalize on this expected movement. Buying option straddles or strangles on the Pound could be a smart way to trade the uncertainty without committing to a specific direction. This strategy allows you to make gains whether the Pound rises due to hawkish news or falls if economic data weakens unexpectedly. For those already invested, protecting against downside risk is essential. Even with optimism around reduced trade friction with the US, global demand remains delicate. We suggest using put options to safeguard long sterling positions from an abrupt downturn. Create your live VT Markets account and start trading now.

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