GBP/USD: British Pound May Fall as the Bank of England Takes a Dovish Turn
GBP/USD: British Pound May Fall as the Bank of England Takes a Dovish Turn
By:Ilya Spivak
The British pound may fall against the U.S. dollar as the Bank of England sets the stage for interest rate cuts
- As Fed rate cut bets unwound, the outlook for other central banks followed.
- Inflation and rates calculus for the Bank of England is different than the Fed.
- Dovish tone at this week’s BOE meeting might weigh on the British pound.
The markets have recalibrated Federal Reserve monetary policy expectations since the beginning of the year.
Having priced in as many as six interest rate cuts for 2024 in January, they adjusted to envision just one 25-basis-point (bps) reduction and a 44% probability of a second one.
That change has echoed across credit instruments globally because of the ubiquity of the U.S. dollar in worldwide commerce.
As markets rethink Fed expectations, global credit markets move
The Bank of International Settlements reckons that close to 88% of global monetary transactions are being settled in terms of the greenback. This means the price of credit rises globally when the cost of borrowing dollars goes up because the Fed hikes rates.
The same dynamic works in the opposite direction. When markets began to speculate on Fed rate cuts in the fourth quarter of 2023, bond yields tracked Treasury rates lower worldwide.
So, as the tally of rate cuts expected of the U.S. central bank began to drop, interest rate futures tracking the priced-in policy outlook for other central banks got caught up in a global repricing of the cost of credit. In the U.K., this meant that 148 bps in cuts priced in at the start of the year fell to 55 bps now.
However, the policy calculus at the Bank of England (BOE) is different than that of the Fed. While U.S. inflation has conspicuously stopped falling in recent months, a steady and broadening disinflation continues in the U.K. The headline consumer price index (CPI) grew 3.2% year-on-year in March, the slowest since September 2021.
British pound at risk if Bank of England is dovish
Upward price pressure from energy and food–the strongest inflationary forces in 2022 and 2023, respectively–has mostly dissipated. Stickiness in discretionary spending categories like recreation and hospitality seem likely to succumb to economic weakness.
The economy sank into recession in the second half of last year, with the gross domestic product (GDP) shrinking for two consecutive quarters. The first quarter of 2022 was the last time that the economy managed to increase output by more than 0.2%. Output is seen rising in the first quarter of this year, but only very slowly.
On balance, this means that the BOE may sound much readier to cut rates than its U.S. counterpart when Governor Andrew Bailey and company deliver a policy update this week. If that moves at least one more official on the rate-setting MPC committee to favor a cut when the votes are tallied, the British pound may fall.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
For live daily programming, market news and commentary, visit tastylive or the YouTube channels tastylive (for options traders), and tastyliveTrending for stocks, futures, forex & macro.
Trade with a better broker, open a tastytrade account today. tastylive, Inc. and tastytrade, Inc. are separate but affiliated companies.
Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options before deciding to invest in options.
tastylive content is created, produced, and provided solely by tastylive, Inc. (“tastylive”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, digital asset, other product, transaction, or investment strategy is suitable for any person. Trading securities, futures products, and digital assets involve risk and may result in a loss greater than the original amount invested. tastylive, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastylive is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparisons, statistics, or other technical data, if applicable, will be supplied upon request. tastylive is not a licensed financial adviser, registered investment adviser, or a registered broker-dealer. Options, futures, and futures options are not suitable for all investors. Prior to trading securities, options, futures, or futures options, please read the applicable risk disclosures, including, but not limited to, the Characteristics and Risks of Standardized Options Disclosure and the Futures and Exchange-Traded Options Risk Disclosure found on tastytrade.com/disclosures.
tastytrade, Inc. ("tastytrade”) is a registered broker-dealer and member of FINRA, NFA, and SIPC. tastytrade was previously known as tastyworks, Inc. (“tastyworks”). tastytrade offers self-directed brokerage accounts to its customers. tastytrade does not give financial or trading advice, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastytrade’s systems, services or products. tastytrade is a wholly-owned subsidiary of tastylive, Inc.
tastytrade has entered into a Marketing Agreement with tastylive (“Marketing Agent”) whereby tastytrade pays compensation to Marketing Agent to recommend tastytrade’s brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastytrade. tastytrade and Marketing Agent are separate entities with their own products and services. tastylive is the parent company of tastytrade.
tastycrypto is provided solely by tasty Software Solutions, LLC. tasty Software Solutions, LLC is a separate but affiliate company of tastylive, Inc. Neither tastylive nor any of its affiliates are responsible for the products or services provided by tasty Software Solutions, LLC. Cryptocurrency trading is not suitable for all investors due to the number of risks involved. The value of any cryptocurrency, including digital assets pegged to fiat currency, commodities, or any other asset, may go to zero.
© copyright 2013 - 2024 tastylive, Inc. All Rights Reserved. Applicable portions of the Terms of Use on tastylive.com apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastylive’s podcasts as necessary to view for personal use. tastylive was previously known as tastytrade, Inc. tastylive is a trademark/servicemark owned by tastylive, Inc.