What Could be Next for Cable Amid Market Volatility

Following the BOE's first interest rate cut of the cycle, the pound has continued to decline versus the dollar in volatile market conditions after the currency has faced added pressure as the central Bank remains silent in the wake of the rate decision.

Long Slope Downhill

After dropping unexpectedly on Monday, markets have struggled to regain upward momentum in subsequent days. The FTSE 100 index, with its large exposure to global economic conditions beyond the United Kingdom, has tracked a general loss of confidence in growth for the rest of the year. As a result, the market is now pricing in more stimulus measures across major central banks than just over a week ago, including further easing by the Fed, ECB and BOE. Whereas markets were hesitant to foresee additional rate cuts by the BOE last week, the view has shifted to anticipate two more reductions following the one already implemented.

The weaker outlook for UK government bonds also left the pound trading weaker than the dollar and other major currencies. However, the British currency faced extra pressure as it could not benefit from safe-haven demand. Meanwhile, the unwinding of yen carry trades contributed to dollar weakness over the course of the week, potentially impacting up to $1.1 trillion in Japanese securities. While the greenback had one of its worst weeks of the year early on, the pound declined at an even steeper rate.​

Where Could It Stop?

Immediately after the narrow interest rate decision, BOE Chief Economist Huw Pill stressed on two occasions that there was no set path for rate cuts as inflation remained stubborn. Pill had been one of the dissenting voters in favour of maintaining rates. It seems the Bank wanted to convey to markets that it is not yet time to be overly optimistic about rate decreases. Since then, the BOE has remained notably silent, with no MPC members making public remarks amid market turmoil.

The markets already have plenty to consider. Several issues have made traders nervous, such as ongoing social unrest in the UK. Additionally, new Chancellor Rachel Reeves has warned that there is less funding available for the government than initially expected. She said she would propose tax rises in the upcoming budget, having previously reassured markets that finances would stay in good order before the election. Increased taxation could pose a further challenge with the UK economy barely recovering and inflation yet to be fully reduced. Traders will likely scrutinise upcoming employment and economic growth data next week to see if there are more warning signs.​

Cable Revisits Triangle Range

GBPUSD returned within the range formed by its longer-term triangle pattern, raising the likelihood of further decreases towards 1.25 should support at 1.26 fails to hold the line. This could pave the way for lower levels, bringing 1.23 and 1.204 into focus. Conversely, if the trend re-reverses course and the cable breaks above 1.29 and the 1.3050 regional resistance, flipping 1.3150 may pave the road to 1.34 – equal to the 1.23-1.3050 leg extension.

Source: SpreadEx

Key Takeaways

Since the BOE's interest rate cut, the pound has declined against the dollar in volatile market conditions. Markets have struggled to regain momentum, with the FTSE 100 tracking reduced growth confidence. Central banks are now expected to provide more stimulus, including two further BOE cuts. Weaker UK government bonds also weighed on the pound versus other major currencies. The Bank has remained silent despite interest rate decision uncertainty and recent market turmoil, so investor concerns have been exacerbated.