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The interest rate cut expected from the Bank of England this week is limiting the British pound's further upward potential and is also prompting investors and traders to consider whether the monetary policy easing cycle may be nearing its end, almost a year and a half after it began.
The 25-basis-point rate cut expected on Thursday, which would bring the Bank of England's base rate down to 3.75%, could negatively affect the pound in the short term. However, the rate would already be one to two cuts below the level that a number of experts—including Governor Andrew Bailey—consider to be the UK's neutral interest rate.
For this reason, attention will shift to the Bank of England's next steps. If the accompanying statement hints at a slower pace of rate cuts going forward, the pound could find support. However, if the Bank appears more cautious regarding inflation and growth prospects, the pound could come under significant selling pressure.
Although most members of the Bank of England's Monetary Policy Committee are reluctant to specify what they believe the neutral interest rate should be, it is already influencing their decisions. Excluding Bailey, the nine-member committee has seen an even split in recent months between hawks and doves. According to a survey, economists expect a narrow majority this week—five votes to four—in favor of a rate cut.
Disagreements within the Monetary Policy Committee center on what deserves greater attention: persistently high inflation in the UK, which stood at 3.6% as of October, or a weakening labor market. These conflicting factors have gradually made rate cuts more difficult since the easing cycle began in August 2024. The approaching neutral rate will only complicate the process further.
Many traders are now betting that the central bank will be forced to pause or end its monetary easing cycle in the coming months as it approaches its own neutral rate. However, there are others—including analysts at Morgan Stanley and Capital Economics—who believe that a deteriorating economic outlook, and let me remind you that UK GDP continues to contract actively, will push policymakers toward further rate cuts. Economists expect the Bank of England's policy rate to fall to 3.25% in the second half of next year.
As for the current technical picture of GBP/USD, pound buyers need to break through the nearest resistance at 1.3395. Only then will a move toward 1.3430 become possible, above which a breakout would be quite challenging. The most distant target lies in the 1.3474 level. In the event of a decline, bears will attempt to regain control at 1.3355. If they succeed, a break of this range would deal a serious blow to bullish positions and push GBP/USD down toward the 1.3320 low, with the prospect of a move to 1.3285.
*The market analysis posted here is meant to increase your awareness, but not to give instructions to make a trade.
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