**GBP/USD and GBP/JPY Vulnerable to Dovish BOE Cut**
*Original article by Lavanya Rathnam*
The British Pound has come under renewed pressure against major counterparts, notably the US Dollar (GBP/USD) and the Japanese Yen (GBP/JPY), against the backdrop of potential dovish action from the Bank of England (BOE). As markets digest evolving monetary policy expectations, mixed UK data, and global economic shifts, traders seek perspective on the outlook for both pairs ahead of the imminent central bank decision.
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**BOE Policy Outlook: A Turning Tide**
In 2024, the BOE finds itself at a financial crossroads. The central bank, like its global peers, had embarked on a path of aggressive rate hikes in response to soaring post-pandemic inflation. However, with price growth finally showing signs of cooling, focus now shifts to the timing and scale of policy easing. Whereas earlier in the year the market priced in a singular rate cut, current sentiment leans more distinctly dovish, with speculators increasingly betting on an imminent reduction in the benchmark rate.
– **Current BOE Rate:** The BOE Base Rate currently sits at 5.25 percent, the highest level in over 15 years.
– **Market Pricing:** Overnight index swaps in early June were pricing nearly two full 25bps rate cuts by the end of 2024, with the first potentially as soon as August.
– **Inflation Trends:** Headline CPI in the UK has stepped down to 2.3 percent year-over-year as of April, from double-digit peaks seen in late 2022.
– **BOE Communication:** Recent BOE rhetoric has been interpreted as gradually more dovish, with certain policymakers openly discussing the timetable for cuts if inflation data warrants.
This shift in BOE expectations is particularly significant in the current environment, where both the Federal Reserve and European Central Bank are each charting their own policy course. The prospect of an early and potentially more aggressive BOE cut cycle places sterling under performance pressures, notably against both the US Dollar and Japanese Yen.
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**GBP/USD Analysis: Under the Weight of Diverging Central Bank Paths**
The GBP/USD pair, long a bellwether for both UK policy outlook and global risk appetite, has experienced increased volatility in recent weeks. This volatility is exacerbated by contrasting signals from the BOE and Federal Reserve.
– **Federal Reserve Stance:** Unlike the BOE, the Federal Reserve has adopted a hawkish hold, keeping rates at 5.25-5.50 percent and requiring more substantial evidence of weakening inflation before reversing policy.
– **Yield Differential:** As the BOE is seen potentially cutting ahead of the Fed, the interest rate differential threatens sterling’s yield appeal, resulting in renewed downside.
– **Economic Data Backdrop:**
– UK GDP growth remains tepid, registering just 0.6 percent for Q1 2024.
– Wage growth persists but is losing steam, alleviating BOE concerns about a wage-price spiral.
– The US economy remains resilient, supporting the dollar on dips.
– **Technical Picture:**
– The GBP/USD pair has carved out a lower high beneath the 50-day moving average in June.
– Key support sits near 1.2650-1.2600, with further selling pressure likely if these levels break.
**GBP/USD: Short-Term Scenarios**
1. **Dovish BOE and Firm Fed:**
– If the BOE signals imminent easing and the Fed retains its hawkish stance, the pound risks breaking lower toward 1.2500 and possibly 1.2300.
– Dollar strength on safe-haven flows and higher relative yields would accentuate this move.
2. **Neutral Central Bank Outcomes:**
– Should the BOE temper expectations for aggressive cuts while the Fed flags potential headwinds, GBP/USD may stabilize within a sideways range (1.2600-
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