GBP/USD forecast: Hawkish BoE cut supports sterling

• GBP/USD forecast takes a boost as Bank of England signals it may be near the end of its easing cycle
• Another cut in November is not completely out of question
• GBP/USD breaks key resistance level on rate divergence with the Fed

 

Earlier today the market was surprised by how divided the Bank of England was with its decision to cut rates. Prior to the announcement, investors were fully expecting the 25 basis point rate cut, but to everyone’s surprise that assumption and decision was a close call. For now, the BoE monetary policy committee (MPC) has taken the Bank Rate down to 4%, but don’t the tone was anything but dovish.  This was a classic “hawkish cut” from the BoE, and the messaging has given sterling bulls something to chew on. For the GBP/USD forecast, that shift could prove pivotal as the pair has also broken above the key 1.3370 resistance level, with rate differentials now likely to favour the pound – at least in the near term – given a weakening US economy as was evidence in recent employment ISM reports.

 

BoE: Hawkish slant despite the cut

 

Though the cut itself was widely expected, the language in the accompanying statement has thrown a curveball. The markets have certainly taken the hint. The probability of another move this year has dropped sharply, with barely two further cuts priced in before next summer.

 

It’s clear the MPC is becoming increasingly cautious, particularly with inflation still hovering stubbornly above target – in the 3.5–4% range, by their own forecasts. Food inflation is the standout concern, and policymakers don’t want to risk reigniting an inflation spiral.

 

Interestingly, the Bank doesn’t appear overly concerned about recent signs of cooling in the jobs market. Payroll numbers are drifting lower, but the deterioration is gradual rather than dramatic.

 

Crucially, wage growth and services inflation – both hanging around the 5% mark – are still far too hot for comfort. Until there’s a material shift in either, the BoE will likely continue to lean hawkish, even if it technically eases policy again.

 

When will the BoE cut rates again?

 

Well, that really depends on the data. But despite the more hawkish stance, another cut in November remains possible – though the odds are now slimmer than before today’s rate announcement. A lot hinges on the next couple of inflation prints. If CPI surprises to the upside, or private-sector job losses begin to ease, the Bank may well hold fire.

 

Looking beyond this year, markets are currently pencilling in two more cuts in 2026. But a lot can change until then so take that with a pinch of salt. Indeed, the BoE’s own projections show inflation bang on target in two years’ time. That too is based on the assumption of two further cuts, suggesting the central bank doesn’t think the easing cycle is over yet.

 

What now for the GBP/USD forecast?

 

 

Following today’s hawkish rate cut by the BoE, the GBP/USD forecast leans more towards the bullish side of things. With the Fed likely to cut rates in September and the BoE taking a more cautious path, the widening rate differential could support further gains for sterling. This appears to be especially the case with the exchange rate also showing bullish technical signals. The recently formed double bottom at 1.3140 could be confirmed if rates soon break the resistance trend of its falling wedge pattern around 1.3450 – 1.3500 area. This zone marks the key resistance to watch in the coming days. Short-term support is now seen around 1.3370 and then 1.3300. Long-term support comes in around 1.3000 where we also have the 200-day average converging.

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R