Bank of England Deputy Governor Sarah Breeden said on Thursday that UK inflation would have been at the central bank\u2019s 2% target without the Middle East war. She also said the Iran war shock is less likely to become embedded in inflationary dynamics, and that the BoE is in a good place to monitor developments.<\/p>\n\n
Sterling showed little immediate response. At press time, GBP\/USD was 0.12% lower near 1.3520 as the US Dollar rebounded. Separately, the FXS Speechtracker assigned the comments a score of 3.2\/10, and this compared with the speaker\u2019s 4.1\/10 historic average, indicating a mildly dovish tilt.<\/p>\n\n
We should position ourselves for a more dovish Bank of England in the coming weeks as policymakers signal that underlying inflation pressures are fading. With Deputy Governor Breeden downplaying the long-term impact of Middle East geopolitical shocks, the UK rate-cut cycle could accelerate faster than the market currently prices in. We expect this will put downward pressure on the British Pound, especially as the currency faces resistance near the 1.3520 level against a recovering US Dollar. <\/p>\n\n
To capitalize on this shift, derivative traders should look at shorting GBP\/USD or buying put options on the Pound. Historically, when the BoE tilts dovish while the US Federal Reserve remains cautious, the Pound tends to underperform, much like the post-inflation peak trends we saw in late 2024. Recent data shows UK CPI has hovered near the 2.0% to 2.5% range, and any further drop in services inflation will likely trigger aggressive rate cuts. <\/p>\n\n
We also recommend targeting short-term interest rate futures, such as the three-month Sonia (Sterling Overnight Index Average) contracts, which stand to gain as rate-cut expectations rise. If the BoE moves to cut its base rate from the recent 5.0% range down toward 4.5% or lower by autumn, these contracts will see a significant upward repricing. This environment offers a high-probability setup for options traders to buy call options on Sonia futures to capture the falling yield environment.<\/p>\n\n\n\n