The Bank of England (BoE) announced a 25 basis point policy rate cut, which all nine members of the Monetary Policy Committee (MPC) supported. Two officials even advocated for a more aggressive 50 basis point reduction. The decision, revealed on Thursday, aligns with market expectations. However, the accompanying commentary and updated forecasts surprised investors, particularly the downward revision of the 2025 growth forecast. The rhetoric surrounding the growth outlook was notably downbeat, raising recession concerns.
Further rate cuts appear imminent, with a reduction in May considered a strong possibility. Governor Andrew Bailey has emphasized that any rate reductions will be gradual, highlighting persistent inflationary risks. This cautious approach has bolstered the US dollar, preventing gains for currency pairs like GBP/USD and EUR/USD. On Thursday, GBP/USD traded deep in negative territory near 1.2400, while EUR/USD remained under pressure below 1.0400.
In the United States, weekly Initial Jobless Claims increased to 219,000, adding another layer of complexity to the economic landscape. Investors remain wary, refraining from taking large positions ahead of Friday's crucial US jobs data release. This cautious market stance further supports the USD, contributing to the current dynamics in currency trading.
The BoE's decision to lower rates reflects an acknowledgment of growing downside risks to economic growth. External factors, such as former President Donald Trump's tariffs and significant business tax hikes by the government, continue to weigh on the UK's economic outlook. These elements have prompted the BoE to adjust its forecasts and adopt a dovish stance.
Despite the sharp sell-off in sterling following the rate cut announcement, analysts suggest that the reaction may be slightly exaggerated. Market participants are closely monitoring developments and assessing potential impacts on future monetary policy decisions.