GBPUSD Rebounds Ahead of BoE Decision

9:54 AM 7 August 2025

The Bank of England is expected to cut interest rates, but persistent inflation presents a significant challenge.

Mixed Macroeconomic Data Creates a Conundrum

The Bank of England had already signaled caution on monetary policy easing in previous meetings, and recent data has further complicated the outlook. Inflation has been rising since last autumn, with the June reading of 3.6% once again exceeding the BoE's expectations. This suggests that the latest inflation report will have to account for a higher price trajectory, especially as inflation expectations are now visibly above the current inflation level. Persistently high food prices have also contributed to an increase in inflation expectations among British households, a development that is a cause for concern for policymakers and limits the room for more aggressive easing.

Conversely, there has been a gradual increase in unemployment, which rose to 4.7% against a forecast of 4.6%, alongside a slowdown in wage growth. The economy is also slowing down; according to Bloomberg estimates, the second quarter ended with a marginal GDP growth of +0.1%, significantly below the BoE's earlier forecast of 0.25%. The official Q2 data will be released in the second half of August.


Inflation remains at a distinctly elevated level. Although wage dynamics are decreasing, they are still elevated, which has contributed to the entrenchment of core inflation. Source: Bloomberg Finance LP, XTB

 

Inflationary Pressures Amid a Weakening Economy

The hard data creates a conflict of interest for the central bank. The Monetary Policy Committee is facing the simultaneous risk of sustained higher inflation (particularly due to the effect of food and a potential rise in energy prices) and a noticeably weakening economic outlook. Furthermore, ongoing geopolitical uncertainty (trade relations with the US) and moderately lower tariff rates than anticipated (while still restricting demand for British goods) offer a marginal improvement to medium-term forecasts, but leave the "soft landing" scenario in doubt.

The BoE Decision and Potential Voting Split

Market consensus suggests the BoE will opt for a 25 basis point rate cut, bringing the main interest rate to 4.00%. A split vote is probable, with some proponents of larger cuts (e.g., Swati Dhingra, Alan Taylor) potentially joining the majority supporting a more moderate pace of easing and voting for a 25 bp reduction. A clear signal is also expected that any potential future moves (in September or November) are not a given. The BoE will likely signal its readiness to maintain the current pace of quarterly easing but will emphasize its dependence on incoming data.


The majority of committee members are currently more dovish, though there are potentially as many as four neutral members with a rating of 0 according to Bloomberg. Seven votes for a rate cut are expected today, but a smaller number could be interpreted by the market as a hawkish signal. Source: Bloomberg Economics


The market has fully priced in today's rate cut, but the next one is not expected until December. Source: Bloomberg Finance LP

 

Key Scenarios and Market Reactions

The base-case scenario assumes a 25 bp rate cut and cautious rhetoric. This should stabilize the pound and lead to a slight correction in yields. On the other hand, if a larger number of votes favor holding rates, this could lead to further strengthening of the pound and an increase in yields, which could also potentially harm the stock market. However, if there were full consensus for a rate cut, it could be a negative signal for the pound, although the BoE would then risk a significant increase in inflation expectations.

Summary and Outlook for GBPUSD

The August Bank of England decision will likely follow the path of a moderate cut while maintaining the central message: "monetary policy remains data-dependent, and cuts will be gradual and cautious." The key for markets will be the tone of the communication. If the BoE signals a longer pause on further decisions (skipping cuts in September and November), it could lead to further strengthening of the pound.

The short-term outlook for GBP remains relatively neutral. The market is currently pricing in two more cuts by the end of the year, with a target level slightly below 3.5% by mid-2026. However, sensitivity to inflation surprises and labour market data will remain high, so any deviation from the market's anticipated scenario could trigger more significant changes in the valuation of British assets.

The GBPUSD pair is currently at a critical resistance level around 1.3400. A break above this level could lead to a test of the 1.35-1.37 zone. Such a move would also be supported by potential uncertainty regarding the dollar, should Trump decide to nominate a replacement for Federal Reserve Board member Kugler, who could be a strong candidate for a new chair. The pound, however, may be held back by the clear reduction in net long positions, which are currently negative. A dovish stance from the BoE (all members voting for a cut or indicating the need for further cuts) could lead to a rebound from current levels toward 1.31-1.32.


Source: xStation5

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