Looking to the Futures

British pound futures (/6B, currently set for September delivery) rallied Thursday morning after the BoE lowered the benchmark Bank Rate by 25 basis points to 4.0%. The contract gained nearly half a cent to $1.3429 in the minute following the announcement, before consolidating to settle at $1.3416. That marked the fifth straight day of gains for the contract following six losing sessions in a row.

While rate cuts are rarely bullish for a currency, the margin of victory for the rate cut decision was narrower than expected. That indicates that the Bank may have a more hawkish posture than expected, which would be bullish. The statement accompanying the rate announcement highlighted inflation concerns: “A gradual and careful approach to the further withdrawal of monetary policy restraint remains appropriate.” The Bank is also concerned about growth, calling it “subdued,” which apparently outweighed those inflation concerns. From a peak of 5.25% in August 2023, the BoE has gradually cut rates with five 25-basis-point cuts starting last September.

As mentioned above, the choice between cutting and maintaining rates was closer than expected. Part of the rate forecasting for the BoE is anticipating the vote total. It is typically presented in a Hike-Cut-Hold format. For this election, rate “pollsters” expected the nine-member Monetary Policy Committee to vote 0-8-1 to cut rates. Instead, the vote came in at 0-5-4, indicating the thinnest possible margin for cutting rates. The two prior Bank decisions in May and June came in at 0-7-2(cut) and 0-3-6 (hold) respectively. In contrast, the US Federal Open Markets Committee typically votes in consensus, with all members unanimous behind the decision. At the most recent Fed meeting in July, two members voted to cut rates while the board elected to hold them at 4.25-4.50%. That marked the first “double dissent” on rates from the Fed since 2019. In the 40 meetings over the past five years, the Fed voted unanimously 34 times.

The data examined by the Bank has been worse than expected recently, which could indicate the possibility of stagflation. Inflation has been higher and growth has been lower than forecasts. The most recent inflation report, issued July 16, had prices in June increasing 3.6% year over year versus a forecast of 3.4%, the third straight monthly reading over forecast and the third straight over 3%. As with the Fed, the Monetary Policy Committee has an inflation target of 2%. On the growth side, the July 11 release of May GDP numbers revealed a contraction of -0.1% versus expectations of an increase of 0.1%. That was the second consecutive month-over-month decline in GDP, following a contraction in April of -0.3%. Jobs numbers have also had two straight months of numbers worse than forecasts, with unemployment claims rising by 25.9k, following the June announcement of 33.1k. Unemployment also ticked higher by a tenth to 4.7%.

With the narrow split on interest rates, traders in London now expect rates to hold at 4.0% through the end of the year. Meanwhile, on the dollar side of the trade, the CME FedWatch Tool now shows probabilities over 50% for 25-basis point cuts at the final three meetings this year, pointing to a year-end rate target of 3.50-3.75%.  That divergence in interest rates could lead to gains in the pound. Adding uncertainty to the mix, the future direction of tariffs could impact performance of the pound in the months ahead.

The RSI illustrates volatility in the pound over the last year. In 10 of the past 12 months the contract has traded either above 70 in overbought territory or below 30 in oversold territory. Looking at the trend, a selloff that started with the start of the fourth quarter of last year found a bottom in early January. A six-month rally followed, leading to a peak at the end of June. The MACD is around zero following a few weeks in negative territory. The 9-day SMA was crossed this week, and the 20-day was crossed yesterday. The Parabolic SAR just flipped to a supportive position yesterday.

No Economic Events today.

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