GBP might experience pressure as the Bank of England (BOE) may implement rate cuts more swiftly than the market expects. TD Securities strategists noted that stronger UK economic data has led them to revise their forecast for the next BOE rate cut to May, rather than March.
They project a cumulative 125 basis points of cuts for this year, starting with a 25 basis point reduction in February. Currently, markets are anticipating only around 50 basis points in additional cuts for 2024.
Despite the outlook, sentiment towards sterling is positive but remains at risk of correction if expectations change. Furthermore, uncertainty about potential tariffs from a second Trump presidency could exert additional pressure on the pound against the dollar.
If the Bank of England moves faster with rate reductions than markets have priced in, sterling could come under further strain. The changes in expectations around monetary policy have already shifted, with stronger UK economic data causing analysts at TD Securities to adjust their projections. They now see the central bank holding off until May before making a cut, shifting their initial forecast from March.
This adjustment also brings a broader expectation that rates could be lowered by a total of 125 basis points this year. The first reduction, according to their predictions, is likely to come in February, trimmed by 25 basis points. In contrast, traders appear to be pricing in a more gradual approach, with market expectations only pointing to an additional 50 basis points of cuts over the course of 2024.
Given this backdrop, there is an apparent optimism towards sterling, but the risk of a shift in sentiment remains. If expectations around rate decisions are reshaped once again, the potential for downward movement grows. It is also worth recognising that external risks—such as trade policies in the United States—are adding another layer of unpredictability. A second Trump presidency could introduce fresh tariffs, which would likely weigh further on the pound’s performance against the dollar.
For those assessing market moves, it is important to take into account both monetary policy shifts and political developments. Any adjustment in the pace of rate cuts has the potential to move markets, particularly if expectations diverge further from reality. With external factors like trade policies also influencing the outlook, upcoming weeks may see heightened volatility.
