The Bank of England recently implemented a 25 basis point rate cut, which featured a hawkish tone. The Monetary Policy Committee encountered an unprecedented situation requiring two voting rounds to secure a 5-4 majority due to unexpected dissent.
Hints of Future Policy
The BoE suggested an approaching end to the easing cycle, noting decreased monetary restrictiveness as the Bank Rate was lowered. Despite Governor Andrew Bailey’s less hawkish press conference, inflation forecast revisions and subdued job market concerns provide rationale for the yield curve shift and sterling’s rise.
An additional rate cut by year-end remains only 75% anticipated. The meeting’s focus included a reduction in quantitative tightening, with the MPC estimating QT contributed 15-25 basis points to back-end yields, supporting expectations for a September reduction.
Robust hawkish dissent underscores the importance of future inflation data, as clearer moderation is required to price in another 2025 cut. Sterling remains strong, but fiscal challenges and the euro’s strength may cap EUR/GBP adjustments, while the potential for the cable to surpass 1.35 is considered viable.
Given the Bank of England’s recent hawkish rate cut, we see a clear signal of uncertainty. The tight 5-4 vote to lower the Bank Rate shows a deep split within the committee about the future path of inflation. This division suggests that any single data point could dramatically shift expectations in the coming weeks.
Market Strategies and Observations
We need to pay close attention to the incoming inflation figures, especially after the latest data for July 2025 showed headline CPI remaining sticky at 2.3%. More importantly, services inflation came in at a stubborn 4.5%, giving credibility to the hawkish members who voted against the cut. This reinforces the idea that the path to the 2% inflation target is not yet secure.
For interest rate derivatives, this environment suggests volatility is underpriced. With the market only pricing a 75% chance of another cut this year, there is opportunity in options strategies that benefit from sharp moves in either direction. We believe selling short-dated sterling interest rate futures could be a cautious way to position for the bank’s reluctance to ease further.
The planned reduction in Quantitative Tightening (QT) in September is another key event on our radar. The BoE’s own estimate that QT added up to 25 basis points to long-term yields means a slowdown should support gilt prices. This could lead to a steeper yield curve, making curve-steepener trades attractive.
In the currency markets, we see Sterling’s strength persisting. After the announcement, the GBP/USD exchange rate has been testing the 1.3350 level, and we see a clear path toward the 1.35 target. We are reminded of the sharp currency swings in 2024, which showed how quickly sentiment can turn, so we would favour using options to define risk while positioning for further upside in cable.
However, we are more cautious on Sterling’s strength against the Euro. With the European Central Bank also maintaining a firm stance, gains in the EUR/GBP cross may be limited. Therefore, we believe the most effective way to express a bullish view on the pound is against the US dollar.
