Markets Evenly Split About BOE's Rate Cut

The BOE faces uncertainty as markets see the BOE as evenly divided over whether to hold or lower interest rates by a quarter point.

Lack of Guidance

Central banks typically provide markets advance notice of major policy changes. The BOE is no exception, especially given the United Kingdom's current financial situation (the "minibudget" disaster is still fresh in monetary policymaker's minds). However, rate cuts are widely anticipated, so a reduction may not surprise markets as much as the timing. At its last meeting, the Bank likely remained neutral due to the UK election, possibly delaying explicit guidance on a rate ut. However, the previous 7-2 vote implies that members' views had yet to shift fully.

Markets price a 50-50 chance that Threadneedle Street will pull the trigger tomorrow. This means the cable will likely move either way. It is not just whether a cut occurs but also the strength of communicated intentions. A dovish hold implying a September rate cut could satisfy markets like a cut paired with warnings against future cuts based on inflation coming back up.

Tipping the Balance

Markets generally agree the vote will be close, either 5-4 for or against a rate cut. A larger majority could create unexpected reactions. Around 80% of economists recently polled by Reuters said easing is coming as headline inflation meets targets. After all, following the ECB's rate cut and a fully priced-in rate cut for the Fed in September, economists see this as enough reason to cut rates.

Notably, Governor Andrew Bailey said markets reasonably foresee interest rate cuts. This implies the Bank feels markets already expect a cut, eliminating the need to provide an advanced warning. However, some officials express concerns about wage inflation in the midst of strong job growth and GDP above expectations. Given a narrow vote profile, market reactions may rely on how investors interpret the Bank's statement and Bailey's post-meeting presser.

We could see significant cable volatility in most scenarios as investors weigh the Bank's relative uncertainty versus the certainty around the Fed's expected cut in September.

Pullback Post Triangle Breakout

The symmetrical triangle pattern indicates further upside for cable in the long run, with a potential measured move target of 1.3884. A break above 1.3145 could drive prices higher. Medium-term resistance lies at 1.3420, which correlates to the 100% extension of the previous upwards leg. In the near term, 1.3050 remains a key level for traders. If cable slides below 1.2750 and within the triangle's range, additional declines would be possible down to support zones at 1.2620 and 1.2445.

Source: SpreadEx / GBPUSD

Key Takeaways

Markets are evenly split on whether the BOE will cut interest rates by 0.25% at its upcoming meeting. Without clear guidance from the Bank, the meeting outcome is difficult to predict, risking volatility in the British pound. A close vote could especially surprise markets, but Governor Bailey has acknowledged rate cuts are widely anticipated, lessening the need for an explicit signal. The Bank must weigh concerns over inflation against weak economic conditions as it tips the balance on its rate decision.