Forex Opinion & Analysis

Pound shows little reaction as BoE holds rates

The British pound is showing limited movement on Thursday. GBP/USD is up 0.15%, trading at 1.2515 in the North American session at the time of writing.

Bank of England maintains rate at 5.25%

The Bank of England kept the cash rate unchanged at 5.25% for a sixth straight time in a widely expected move. The British pound dropped slightly after the announcement but then recovered.

The breakdown of the vote by the nine members of the MPC was noteworthy, as two members voted for a 0.25% cut, with seven voting to hold rates.

At the April meeting, the vote was eight members in favor of a hold and one voting to cut rates by 0.25%. The meeting minutes made reference to the split vote and also noted a “range of views” among MPC members over inflation risks. Governor Bailey still has a solid majority but if additional MPC members veer away from Bailey’s stance, it will complicate his job and could affect his credibility.

The markets were hoping that the BoE would use today’s meeting to signal a rate cut in June, much in the way that the European Central Bank essentially confirmed a June rate cut at its April meeting. However, Bailey wouldn’t provide any hints, saying that “a change in the bank rate in June has neither been ruled out or a fait accompli”.

Bailey also stated that the BOE could start to cut before the Federal Reserve, which has delayed plans to lower rates due to rising inflation in the US. The BoE would prefer to have the Fed move first, otherwise a BoE rate cut will hurt the British pound which could result in higher inflation.

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The Fed has put the brakes on plans to lower rates as inflation as proved stickier than expected. Fed members have said that monetary policy needs to remain restrictive and Boston Fed president Susan Collins said on Wednesday that inflation will take more time to fall than expected and added “there is no pre-set path for policy”. The Fed has been pouring cold water on rate cut expectations although the markets still expect two rate cuts before the end of the year.

GBP/USD Technical

  • GBP/USD dropped below support at 1.2468 and put pressure on support at 1.2440
  • 1.2497 and 1.2525 are the next resistance lines

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