Pound Declines Amid BoE Rate Cut Talk. Forecast as of 24.07.2025
The British economy is not facing a precipitous decline, with inflation rates remaining high. What factors might prompt the Bank of England to consider a rate cut? One potential reason for this could be the significant increase in debt servicing costs. Let’s discuss this topic and make a trading plan for the GBPUSD and EURGBP pairs.
The article covers the following subjects:
Major Takeaways
- The derivatives market expects a 50 bp cut in the repo rate.
- The UK budget deficit is growing due to debt.
- The UK is on the verge of stagflation.
- Long trades can be opened if the EURGBP pair breaks through 0.869 and 0.87.
Weekly Fundamental Forecast for Pound Sterling
Is central bank independence a viable concept? JP Morgan believes that the pressure exerted by the US administration on Jerome Powell is not as significant as some have suggested. The US administration and the Fed have been pursuing coordinated economic policies for decades, but few people are aware of their close cooperation. The Bank of England’s intention to cut rates indicates that such processes are occurring universally, thereby pushing the GBPUSD rate lower.
The British labor market and economy are stable, and inflation is proving more sticky than expected. According to Worldpanel, food prices have increased by 5.2% over the past four weeks. This will result in an average annual increase of £275 in household food spending. An elevated CPI can hurt the economy, and the Bank of England should maintain a high repo rate.
BoE Repo Rate and UK Inflation
Source: Bloomberg.
Andrew Bailey has signaled a potential loosening of monetary policy. Against this backdrop, the derivatives market anticipates a rate cut in August, projecting two instances of monetary expansion before year-end. The main reason behind this decision lies in the BoE’s desire to play along with the Labour Party government.
In June, the UK budget deficit amounted to £20.7 billion, representing an increase of £6.6 billion compared to the previous year and more than four times the amount projected by Bloomberg. The primary reason for this was an £8.4 billion increase in debt servicing costs over the year. As a result, bond yields are increasing, which is leading to higher government spending. Notably, the government should address budgetary shortfalls. The issuance of gilts is not the optimal solution. The remaining solution is to consider ways to reduce spending.
UK 30-Year Gilt Yield
Source: Bloomberg.
The markets doubt that Rachel Reeves can effectively fulfill the role of Chancellor of the Exchequer. However, the transition in leadership, whether through resignation or appointment, is unlikely to result in significant changes. The UK should make adjustments to its budgetary regulations as Friedrich Merz did. Germany’s shift from fiscal restraint to profligacy has allowed the EURGBP rate to increase. Notably, the currency pair has shown a notable increase of more than 5% from its February low.
While speculation about the Bank of England’s alignment with the government’s policies is possible, it is evident that the UK economy is experiencing a period of stagflation. This, in conjunction with the projected slowdown in the global economy due to the impact of tariffs, limits the likelihood of a rally in the pound against the US dollar.
Weekly GBPUSD and EURGBP Trading Plan
In light of all the above, traders should close long trades formed at 1.3395 on the GBPUSD pair. Another point to consider is the upward trend in the EURGBP pair, which is likely to persist. As a result, long positions can be opened on a breakout of resistance levels of 0.869 and 0.87.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of EURGBP in real time mode
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