UK interest rates were cut today for the first time in four years, down to 5% (a cut of 0.25%).
The decision arrived on a knife edge, with four MPC members voting to keep rates on hold being overruled by five voting in favour of the cut.
Prior to the decision, the market expected the outcome to be very close, but expectations shifted slightly more towards a cut as the morning drew on. Therefore, Sterling had already lost some ground going into the event, so was relatively unphased upon the decision with any losses quickly stemmed. In the press conference that followed, Governor Bailey didn’t give too much away about further cuts and implied that they’ll be guided by the data.
As things stand, traders are pricing in around a 55% chance of another rate cut at their next rate-setting meeting in September (19th). So, it could be another close call, but there are two key inflation reports (CPI – 14th Aug and 18th Sept) ahead of that meeting which could change these odds depending on their outcomes.
As a result, Sterling has been relatively choppy today. The GBP/USD has touched a 4-week low earlier but has since clawed back 0.5 cents and it currently trades at a 3-week low. The GBP/EUR had fallen to the lower end of its 3-week range but has now pulled back around 40pips since the earlier falls. Traders will now move their focus over to tomorrow’s US nonfarm payroll figures to gain a clearer picture of how well the US economy is performing.
