BoE Interest Rate Decision: Analysing the Impact on GBP/JPY, GBP/USD, and EUR/GBP

The pound moved higher immediately after the BoE rate cut, though currency movements remain subject to market volatility and other drivers. Market commentators note that traders expect the Bank of England may reduce interest rates further, partly due to signs of weakening labour market conditions and broader economic uncertainties. Employment demand has declined as business owners are reducing their workforce to counteract the effects of higher contributions to social security schemes. In the last Autumn Statement, Chancellor of the Exchequer Rachel Reeves announced an increase in employers' contribution to National Insurance (NI) to 15%.

In the accompanying Monetary Policy Report, the Bank of England recognised that underlying economic growth remains sluggish, and slack has appeared across the economy. However, it also noted a decline in trade policy uncertainty, creating a somewhat more stable environment. The central bank emphasised that the timing and pace of future rate cuts will depend on how quickly inflation declines. Policy decisions will be driven by incoming data. During his press conference, Governor Andrew Bailey delivered a cautious message, stating, "Interest rates are still on a downward path, but any future cuts will need to be made gradually and carefully." He pointed out that the labour market is softening and that domestic wage and price pressures have generally eased. Still, Bailey warned that the risk of second-round effects, such as rising wages pushing inflation back up, remains relevant. He stressed, "It's important that we do not cut the bank rate too quickly or too much." He also mentioned that headline inflation could rise slightly in the near term, but there are "good reasons not to expect that increase to last." Additionally, he explained that a gradual normalisation (the steady easing of wage inflation to a normalized state after extraordinary conditions) in pay growth should help reduce service inflation over time. The Bank of England increased its short-term inflation forecast, now projecting UK headline inflation to reach 4.0% in September, up from the previous estimate of 3.7%.

How Will the BoE's Rate Cut Influence the EUR/GBP Exchange Rate?

Sterling rose immediately after the rate cut, though moves also reflected Eurozone industrial data. The Bank of England (BoE) reduced rates by 25 basis points to 4% following its monetary policy meeting, with four committee members voting to hold rates steady, suggesting the bank may be more cautious with future rate cuts. The bank's statement mentioned that inflation temporarily increased this year, mainly due to energy and food prices, and could rise further in the coming months. However, they remain confident that inflation will return to the 2% target over the longer term. According to the bank, US tariff rates are still higher than in previous periods, but an agreement with the US administration has alleviated trade uncertainties. This, the bank notes, indicates slightly higher global demand than previously projected.

The shared currency is supported by news of a meeting between US envoy Steve Witkoff and Russian President Vladimir Putin, seen as positive by US President Trump, fuelling speculation about a potential peace summit between Russia and Ukraine. Meanwhile, Germany's industrial activity dropped more than expected in June, weakening the euro. In the Eurozone's main economy, industrial output declined by 1.9% month-on-month, according to seasonally and calendar-adjusted data from Destatis, contrasting with the forecasted 0.5% decline and May's 1.2% growth. German industrial production also fell 3.6% year-over-year in June, down from May's 1% rise. Germany's trade surplus for June was EUR 14.9 billion, below the EUR 17.3 billion expected and last month's EUR 18.6 billion. The HCOB Services PMI for the euro area edged down from 51.2 to 51 in July, indicating some slowing, with France's index decreasing from 49.7 to 48.5 and Italy's rising slightly from 52.1 to 52.3, though both remain below estimates. On Monday, the EU announced it would delay countermeasures against US tariffs by six months, from the initial plans for this week, but trade negotiation outcomes remain uncertain. US President Donald Trump warned that if the EU fails to meet a contentious investment pledge in the trade deal, a 35% tariff would be imposed across the bloc.

In today's session, EUR/GBP declined following the BoE's hawkish cut (a cut accompanied by caution about further easing), German Industrial Production, Trade Balance data, and Eurozone Economic Bulletin.

How Will the BoE's Rate Cut Influence the GBP/USD Exchange Rate?

The GBP/USD pair moved higher following the BoE decisions to cut interest rates on a close vote split, signalling that policymakers remained worried about inflation. In its monetary policy statement, the BoE revealed that it would take a "gradual and careful approach" to further cuts on the Bank Rate, but added that "The restrictiveness of monetary policy had fallen as Bank Rate had been reduced." Analysts suggest this may increase pressure on Chancellor Reeves, who could consider tax changes later in 2025. Traders remain cautious as further developments about the next US Federal Reserve (Fed) Chair unfold. US President Donald Trump announced on Tuesday that he plans to appoint the Fed's Chair and Kugler's successor by week's end. The weaker-than-expected labour market report has heightened expectations that the Fed might cut interest rates by 25 basis points in September. Federal Reserve Bank of San Francisco President Mary Daly stated on Wednesday that the Fed still has some ground to cover in fighting inflation, despite some progress. Daly noted that the Fed could be compelled to act soon without having the complete picture. Additionally, Boston Fed President Susan Collins and Fed Board member Lisa Cook warned that ongoing uncertainty remains a significant barrier to effective policy implementation.

Trade tariff jitters, Fed speeches and speculations about the new Fed nominee will continue to influence the GBP/USD exchange rate.

How Will the BoE's Rate Cut Influence the GBP/JPY Exchange Rate?

The GBP/JPY pair rose for a third consecutive session, though future movements remain uncertain. The Bank's Monetary Policy Report noted that underlying economic growth remains weak and slack has surfaced throughout the economy. However, it also highlighted a decrease in trade policy uncertainty, creating a slightly more stable environment. The central bank stressed that the timing and speed of future rate cuts will depend on how quickly inflation drops and confirmed that policy decisions will be based on incoming data.

Conversely, market sentiment towards the yen remains cautious following the Bank of Japan (BoJ) Summary of Opinions report for July's monetary policy. The report indicated that board members persisted in their view for further interest rate hikes despite considerable uncertainty over tariffs. It also revealed that Japan's economic growth is expected to slow, and the pace of underlying inflation will remain sluggish temporarily. Earlier, the Ministry of Internal Affairs and Communications reported that Japan's household spending increased in June at a slower rate than anticipated, as rising prices put additional pressure on overall consumption trends. Consumer expenditure fell by 5.2% month-on-month, marking the steepest decline since January 2021, which suggests that prospects for the BoJ to hike rates may be further delayed. On the data side, the government's downward revision of its GDP forecasts has countered Japanese officials' efforts to push for higher interest rates. The Japanese Cabinet Office lowered its 2025 GDP growth forecast from 1.2% in January to 0.7%, citing the impact of Trump's tariffs on reducing exports to the US and affecting the global economy. Japanese trade envoy Ryosei Akazawa stated on Friday that the US has agreed to amend a presidential order on tariffs and to refund any incorrect duties collected. He also noted that there is no disagreement between the US and Japan regarding reciprocal tariffs.

The BoE’s cautious rate cut appeared to strengthen the pound in the short term, especially against the yen and euro. While GBP/USD remains sensitive to Fed developments and weak US data, GBP/JPY and EUR/GBP are mainly influenced by diverging central bank outlooks and global trade risks. Moving forward, inflation figures, labour market trends, and central bank signals will be crucial in determining the pound’s future direction.

(Trading foreign exchange and CFDs is high risk and not suitable for all investors. You may lose more than your initial investment.)

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