Bank of England cuts rates, British pound slips

The British pound is sharply lower on Thursday. In the North American session, GBP/USD is trading at 1.2434, down 0.56% on the day. The pound fell as much as 1.1% but has pared around half of the losses.

The Bank of England (BoE) lowered interest rates by 0.25% at today’s policy meeting, bringing the bank rate to 4.5%, its lowest level since May 2023.  Today's move was widely expected and the Monetary Policy Committee vote to lower rates was unanimous at 9-0.  Seven of the members voted for a 0.25% cut while two members voted for a larger reduction of 0.50%.  The vote was a slight surprise as the markets had expected that eight members would vote for a cut while one would vote to hold rates.

Governor Bailey sounded dovish at his post-meeting press conference, saying that the BoE expects to continue lowering rates as inflation is projected to move lower.  Still he warned that there is much uncertainty and that rate decisions would be made on a meeting-by-meeting basis.

The BoE’s rate statement noted that there had been “substantial progress on disinflation over the past two years”.  Still, the statement stressed the cautious stance of the Bank, saying that it would take a “gradual and careful” approach to further rate cuts.  This means that the BoE would prefer to deliver modest cuts in increments of 25-basis points, provided that disinflation remains in place.

This week's PMIs are painting bleak picture of the UK economy.  Manufacturing remains in contraction and services is barely showing growth. Earlier today, construction PMI dropped sharply to 48.1 from 51.2, which indicates contraction.  This weak release has contributed to the pound's decline today.

• GBP/USD is testing support at 1.2462 earlier. Below, there is support at 1.2420
• 1.2506 and 1.2548 are the next resistance lines