Sterling Could Fall if Data, Budget Lead to Rate Cuts — Market Talk

The British pound traded around $1.305, trimming earlier gains and staying near a seven-month low of $1.301, after the Bank of England voted 5–4 to keep its policy rate unchanged at 4%, noting that CPI inflation is judged to have peaked.

Notably, four members voted to cut rates by 25 basis points to 3.75%, more than markets had anticipated.

The BoE said that the risk of persistent inflation has diminished, while downside risks from weaker demand have become more apparent, leaving the overall outlook more balanced.

Policymakers added that, if progress on disinflation continues, the Bank Rate is likely to follow a gradual downward path, though they emphasized that further evidence is needed before easing policy further.

Sterling is likely to weaken if the Bank of England leaves interest rates unchanged but signals a possible rate cut in December, Commerzbank's Michael Pfister says in a note. "Voting behaviour has been highly volatile this year, so if the decision to keep interest rates unchanged is close, the market is likely to interpret this as a sign of an interest-rate cut in December." The BOE's new forecasts and press conference could also potentially provide hints on a December move, he says. The BOE announces its decision at 1200 GMT. Sterling rises 0.3% to $1.3084 versus a softer dollar but falls against the euro, which trades up 0.1% at 0.8808 pounds. (renae.dyer@wsj.com)

Sterling is unlikely to fall much further in the near term as Bank of England interest-rate cut expectations have come far enough for now, ING analyst Chris Turner says in note. Investors expect greater fiscal spending in next month's U.K. budget, meaning the BOE could take the strain by cutting rates again sooner than previously anticipated, he says. However, there's limited scope for a further repricing in rate bets for now so it's "a little dangerous" to chase sterling much lower, he says. Sterling is steady at $1.3195 after hitting a five-and-a-half-month low of $1.3137 on Wednesday. The euro rises 0.2% to 0.8805 pounds after hitting a two-and-a-half-year high of 0.8817 on Wednesday.(renae.dyer@wsj.com)

The British pound extended losses below $1.32, its weakest level since April, pressured by a stronger dollar after the Fed lowered the fed funds rate by 25bps as expected but Chair Powell cautioned that another cut this year is not guaranteed.

Sterling has also come under pressure this week as traders modestly increased bets on BoE rate cuts, while expectations grow that November’s budget could deliver a major hit to economic growth.

During parliamentary questions on Wednesday, Prime Minister Keir Starmer declined to rule out increases in income tax, national insurance, or value-added tax.

Meanwhile, reports suggest that the OBR plans to downgrade the UK’s productivity growth forecast by around 0.3 percentage points, a revision that could create a £20 billion shortfall in public finances.

Softer inflation data have also reinforced expectations of monetary easing, with the BRC reporting further declines in food price inflation.

The British pound fell to around $1.325, its weakest level since late July, as traders slightly increased bets on Bank of England rate cuts.

The move followed reports that the Office for Budget Responsibility plans to downgrade the UK’s productivity growth forecast by about 0.3 percentage points, a revision that could leave a £20 billion gap in public finances.

The downgrade adds pressure on Chancellor Rachel Reeves ahead of next month’s budget, where she is expected to outline measures to address a fiscal shortfall of up to £35 billion.

Softer inflation data also reinforced expectations of monetary easing, with today’s BRC report showing further declines in food price inflation, following last week’s cooler-than-expected CPI figures.

The easing price pressures have helped calm concerns about persistent inflation.

As a result, money markets now assign roughly a 68% probability of a 25 basis-point rate cut by the Bank of England in December.

GBPUSD decreased to 1.32, the lowest since August 2025.

Over the past 4 weeks, British Pound US Dollar lost 1.34%, and in the last 12 months, it increased 1.88%.