- Investors expect the Bank of England to cut its policy rate by 25 bps.
- UK disinflationary pressure gathered further steam in September.
- The 200-day SMA near 1.2810 holds the downside in GBP/USD.
Market consensus points to further easing by the Bank of England’s (BoE) upcoming interest rate decision on Thursday. The BoE has held rates steady at 5.00% in the previous gathering, but shifting investor sentiment now suggests a possible 25-basis-point cut this week.
No surprises are expected at the BoE meeting
At the bank’s September 19 meeting, policymakers stuck to quarterly rate cuts for now, with a November cut the most likely outcome. Regarding quantitative tightening, the committee voted unanimously to maintain the pace of reducing bond holdings by GBP 100 billion over the next 12 months, which again was in line with expectations.
The only dovish elements were the slight downgrades to Q3 GDP and Q4 CPI, though this is more a case of marking to market, which of course is subject to change depending on incoming data.
Looking ahead, indicators of inflation persistence—labour market tightness, private pay growth, and services CPI—should continue to guide policy.
Back to inflation, the headline Consumer Price Index (CPI) receded to 1.7% YoY in September, while the core CPI (which excludes food and energy costs) eased to 3.2% over the last twelve months, and Service inflation remained elevated at 4.9% from a year earlier.
Following the September BoE event, policymaker Catherine Mann expressed a cautious stance on the likelihood of multiple interest rate cuts in the coming months, emphasizing the importance of keeping policy restrictive.
However, early in October, Governor Andrew Bailey indicated that the Bank of England could take a “more activist” approach to rate cuts if there is continued positive news on inflation. Aligning behind Mann’s approach, Chief Economist Huw Pill stated that the British central bank should adopt a gradual approach when reducing interest rates.
Ahead of the BoE’s meeting, TD Securities analysts noted: “We anticipate a 7-2 majority to cut Bank Rate by 25bps and little change from September’s guidance. Incoming growth and inflation data has been softer than the MPC expected in their August projection, but the budget will force some tweaks to the projection (but these will be less positive than markets expect). We do not expect any signal about December’s policy decision.”
How will the BoE interest rate decision impact GBP/USD?
As inflation slowed in September, market participants appear to favour a rate cut at the BoE’s monetary policy meeting on November 7 at 12 GMT.
FXStreet’s Senior Analyst, Pablo Piovano, notes that a rate cut could put further pressure on the British Pound, which could see additional downside if GBP/USD falls below its November low of 1.2833 (November 6). In that case, the next contention should emerge at the key 200-day SMA at 1.2811, prior to the July low of 1.2615.
“On the upside, bulls will be initially eyeing the provisional 55-day SMA at 1.3119. The breakout of that region could put a potential visit to the 2024 peak at 1.3434 (September 26) back into focus”, Pablo concludes.
Economic Indicator
BoE MPC Vote Rate Cut
Interest rates are set by the Bank of England’s (BoE) Monetary Policy Committee (MPC). The MPC sets an interest rate it judges will enable the BoE’s inflation target to be met. It is comprised of nine members – the Governor, the three Deputy Governors, the Bank’s Chief Economist and four external members appointed directly by the Chancellor. Investors look at each member’s vote in order to seek cues over how unanimous was the decision on interest rates.
Next release: Thu Nov 07, 2024 12:00
Frequency: Irregular
Consensus: 7
Previous: 1
Source: Bank of England
UK gilt yields FAQs
UK Gilt Yields measure the annual return an investor can expect from holding UK government bonds, or Gilts. Like other bonds, Gilts pay interest to holders at regular intervals, the ‘coupon’, followed by the full value of the bond at maturity. The coupon is fixed but the Yield varies as it takes into account changes in the bond’s price. For example, a Gilt worth 100 Pounds Sterling might have a coupon of 5.0%. If the Gilt’s price were to fall to 98 Pounds, the coupon would still be 5.0%, but the Gilt Yield would rise to 5.102% to reflect the decline in price.
Many factors influence Gilt yields, but the main ones are interest rates, the strength of the British economy, the liquidity of the bond market and the value of the Pound Sterling. Rising inflation will generally weaken Gilt prices and lead to higher Gilt yields because Gilts are long-term investments susceptible to inflation, which erodes their value. Higher interest rates impact existing Gilt yields because newly-issued Gilts will carry a higher, more attractive coupon. Liquidity can be a risk when there is a lack of buyers or sellers due to panic or preference for riskier assets.
Probably the most important factor influencing the level of Gilt yields is interest rates. These are set by the Bank of England (BoE) to ensure price stability. Higher interest rates will raise yields and lower the price of Gilts because new Gilts issued will bear a higher, more attractive coupon, reducing demand for older Gilts, which will see a corresponding decline in price.
Inflation is a key factor affecting Gilt yields as it impacts the value of the principal received by the holder at the end of the term, as well as the relative value of the repayments. Higher inflation deteriorates the value of Gilts over time, reflected in a higher yield (lower price). The opposite is true of lower inflation. In rare cases of deflation, a Gilt may rise in price – represented by a negative yield.
Foreign holders of Gilts are exposed to exchange-rate risk since Gilts are denominated in Pound Sterling. If the currency strengthens investors will realize a higher return and vice versa if it weakens. In addition, Gilt yields are highly correlated to the Pound Sterling. This is because yields are a reflection of interest rates and interest rate expectations, a key driver of Pound Sterling. Higher interest rates, raise the coupon on newly-issued Gilts, attracting more global investors. Since they are priced in Pounds, this increases demand for Pound Sterling.
