British pound falls to new lows on Bank of England rate cut speculation

Key points

• GBP/USD hit new year-to-date low below 1.2300
• The BoE's policy outlook may mimic the ECB's, straying from the Fed
• UK inflation lowered to 3.2%, quelling fears from BoE officials

GBP/USD hits 1.2300 for the first time since November

The British pound fell to new lows against the US dollar Monday morning, briefly dipping below 1.2300 before stabilizing slightly higher. This 80-pip fall from Monday's open led GBP/USD to its lowest trading price since November 2023. After starting the year above 1.2700, GBP/USD now finds itself down over 3% year-to-date.

BoE's big question: follow the Fed or the ECB?

As major central banks globally begin to consider interest rate cuts, the big question the Bank of England (BoE) faces is whose path to follow - the Federal Reserve or the European Central Bank. The Federal Reserve raised its rates to 5.5%, higher than its European counterparts, leading economists to predict it would be the first to implement cuts. However, strong US data in 2024 has led the Fed to push out rate cuts into the later half of the year, if not further. The ECB, on the other hand, has revealed it will not rely on the Fed's decision-making and will likely begin cutting rates in June.

Central banks risk shifting the relative value of their currency when adjusting interest rates independently of each other. EUR/USD suffered as a result of the ECB's revised rate path, falling from above 1.0800 to near 1.0600.

UK inflation reaches lowest level since 2021

Last Wednesday, inflation in the UK printed at 3.2% - its lowest reading since September 2021, yet it was higher than the forecasted 3.1%. Despite the higher-than-expected reading, BoE Governor Bailey remarked that inflation was "pretty much on track to where we thought we would be." He also said that the UK's current situation is more closely aligned with the Euro Area data, stating "the dynamics of inflation are rather different between Europe — I mean Europe geographically now — and in the US." This stance leads markets to believe the BoE could reasonably follow the ECB's outlook for monetary easing.

Pound hits new low vs the euro following dovish BoE comments

EUR/GBP hit a fresh 3-month high Monday morning above 0.8640 as the euro gains on the pound for the sixth straight trading day. A large part of the recent rally came on last Friday after BoE official Ramsden quelled inflation fears, stating he has become "more confident in the evidence that risks to persistence in domestic inflation pressures are receding." This language, combined with Governor Bailey's remarks earlier in the week, could signal the BoE is ready to cut rates as soon as the ECB.

Could the pound fall further?

With GBP/USD around 1.2300, the pound is already near the bottom of its historic range against the dollar. However, GBP/USD did trade below 1.2000 in 2023 and as low as 1.0500 briefly in 2022. If inflation begins to fall quicker than expected in the UK and economic growth slows further, the pound could see further weakness. Conversely, if the US economy begins to decline, the pound could gain on the US dollar.

How to trade GBP/USD

1. Open an account to get started, or practice on a demo account
2. Choose your forex trading platform
3. Open, monitor, and close positions on GBP/USD

Trading forex requires an account with a forex broker like tastyfx. GBP/USD can be found under the 'Major' pairs tab. Many traders also watch major forex pairs like EUR/USD and USD/JPY for potential opportunities based on economic events such as inflation releases or interest rate decisions. Economic events can produce more volatility for forex pairs, which can mean greater potential profits and losses as risks can increase at these times.

You can help develop your forex trading strategies using resources like tastyfx’s YouTube channel. Our curated playlists can help you stay up to date on current markets and understanding key terms. Once your strategy is developed, you can follow the above steps to opening an account and getting started trading forex.

Your profit or loss is calculated according to your full position size. Leverage will magnify both your profits and losses. It’s important to manage your risks carefully as losses can exceed your deposit. Ensure you understand the risks and benefits associated with trading leveraged products before you start trading with them. Trade using money you’re comfortable losing.