In the early Asian trading session on Friday, the British pound traded around 1.2970 against the US dollar, hindered by the key threshold of 1.30. The pound exhibited volatility following the Bank of England's announcement of a 25 basis point rate cut, bringing the benchmark interest rate down to 4.75%. This marks the second rate cut since 2020. However, Governor Bailey remains cautious about the future path of rate cuts, believing the rates should decrease gradually without rapid or significant adjustments. The rate cut decision on Thursday passed with an 8:1 vote, with only one member opposing, preferring to keep rates unchanged.
Another crucial factor limiting the pound's movement is market concern over the outcome of the US election. There are prospects of Trump's return to the White House with the proposal of imposing more than a 10% tariff on all imported goods, a policy that, if implemented, could have broad implications for the global economy and especially disrupt the Bank of England's rate cut plans. The National Institute of Economic and Social Research (NIESR) pointed out that if the US increases tariffs, the UK’s already weak economic growth could be halved, potentially forcing the Bank of England to alter monetary policy to address possible imported inflation.
In terms of technical analysis, although the daily momentum indicator for the pound shows signs of an upward trend, the short-term trend remains unclear. The 21-day Bollinger band range has narrowed, and the 5, 10, and 21-day moving averages are intertwined, indicating no clear technical bias. Support and resistance levels fluctuate between 1.2877, 1.2835 and 1.3043, 1.3103.
The recent rate cut by the Bank of England reflects an adjustment to the outlook for the economy and inflation. Although the budget plan increases spending and borrowing, which could boost the UK's economic growth by 0.75% next year, it is expected that the growth effect will gradually fade in two years. The core of Chancellor Reeves and Prime Minister Starmer's budget plan is to stimulate economic growth and aim to achieve an inflation rate below 2% by mid-2027.
Although the Bank of England has lowered this year's economic growth forecast from 1.25% to 1%, the 2025 growth forecast has been raised from 1% to 1.5%. Bailey stated that the Bank of England is closely monitoring changes in the global economic environment, particularly the uncertainty in US politics. He noted that the risks posed by global economic fragmentation cannot be ignored, but it is too early to conclude on potential impacts.
The market expects the Bank of England to cut rates two to three times in 2025, reduced from four times prior to the announcement of the budget, reflecting the Bank of England's potential cautious approach to policy adjustments amid global trade tensions.
