Sterling after the BoE meeting

Besides two votes for a rate cut, the BOE’s forward guidance was also overall dovish. Seven out of nine MPC members voted for holding the interest rates, and two members voted for a 25 bps interest rate cut, compared to only one member at the BOE meeting in March. Market participants read the voting split as a sign of easing policies. Investors and market participants expect the first rate cut in July, even earlier than the ECB and Fed, while a rate cut by September is fully priced in.

 

In its latest update, the Bank of England predicted that inflation could drop to its 2% target in the year's second quarter. However, after today's GDP numbers, policymakers may be forced to keep interest rates at restrictive levels for longer.

 

On the inflation front, headline inflation eased to 3.2% annually in March, down from 3.4% in February. Annual Core CPI, which excludes food, energy, and tobacco prices, fell to 4.2% in March from 4.5% in February, still above the 4.1% forecast. Inflationary pressures in the UK remain high, and inflation may take longer than expected to drop to the BOE’s 2% target.

 

After contracting by 0.3% in the final quarter of 2023, monthly GDP data in the first three months of the year, however, revealed that the British economy already avoided recession and has expanded by 0.3% in January, 0.2% in February, and a surprise raise of 0.4% in March.

 

In addition, industrial production rose by 0.2% in March, and manufacturing production increased by 0.3%, both above estimates and the previous month. These numbers show that the British economy is moving forward normally and may force the BOE to pivot to more dovish policies a bit later.

 

GBP/USD surged to the 1.252 level on Thursday, but still, the overall downtrend picture has not changed. If the GBP/USD moves higher and stays above 1.25, it may encounter resistance near 1.263, while support may be found near 1.240. Breaching under the first support can put 1.22 on radars.