What Does The BOE’s Decision Really Mean For the Sterling?

Today, the Bank of England did something that they had not done in nearly four years, and Sterling has fallen as a result. Many traders and investors are wondering if this is enough and how long it will take for the Bank of England to move the muscle again, which would most certainly impact not only the price of Sterling but also the UK's economy.

The Bank of England’s Interest Rate announcement

Many people had widely anticipated that the Bank of England would cut the interest rate today for the first time since 2020. During the COVID period, the BOE took unprecedented steps to cut interest rates rapidly to protect the economy, while the lawmakers on the fiscal side also provided unpredicted support to save the economy from a huge potential crash. The crash did occur, with the UK's economy plunging into recession, but the BOE's actions undoubtedly saved significant damage. Economists and market players widely praised the BOE's specific action, believing that if the bank hadn't acted as it did, the entire economy would have collapsed. What market players and gurus didn’t like was the massive miscalculation on the Bank of England’s side and the even bigger storm that was heading for the UK in the aftermath of COVID, which was inflation. The inflation rate in the UK surged into double-digit territory, literally destroying consumer confidence. In order to ward off this battle, the Bank of England increased the interest rate at the most unprecedented speed and hiked the interest rates all the way to 5.25, the highest level in decades. And today, for the first time in four years, we saw the members of the MPC policy meeting ultimately voting for the rate cut to 5%.

What Does the Rate Cut Really Mean?

The Bank of England's decision today was widely anticipated by traders, yet it resulted in a significant decline in the value of the pound sterling. The question traders are now asking themselves is why this significant move occurred. Essentially, today's event implied that the bank would align its dovish actions, such as rate cuts, with a more balanced, hawkish tone. The hawkish aspect is that the bank has not provided a specific timeline for the next interest rate cut. The Governor of the Bank of England's statement, indicating a strong reliance on data, implies that the next potential meeting will remain a live event, potentially leading to a rate cut earlier than anticipated by the market. In my opinion, this very fact has led to the sterling losing its value against the dollar, intensifying the already ongoing sell-off that began when the price reached 1.30 against the dollar.

Where would the sterling move now?

Well, as discussed above, the selloff started for the sterling when it touched the level of 1.30, and today’s move has only made the selloff more intense. The important factor to pay attention to now is where the price is trading on the daily time frame with respect to its 50-day SMA. Today, we saw the price move below the 50-day SMA but quickly bounce back up, which means that there isn't enough selling pressure for the price to continue to move lower. However, if the price closes below the 50-day SMA, we are likely to witness a further intensification of the current selloff and a move towards the next significant potential point, represented by the support zone. On the flip side, if the price continues to trade above the 50-day SMA, a more likely scenario, we could easily see buyers taking the price back towards the 1.30 mark.

GBPUSD Chart by Exness 

To Conclude

The BOE will remain highly cautious, and this means that any further rate cuts will be very much data-dependent. This implies that inflation must consistently stay close to the BOE target level for the bank to consider further rate cuts. If we observe a downward trend in the inflation reading, indicating multiple negative readings, the BOE is unlikely to intensify its hawkish stance, which could potentially lead to a rise in the value of sterling.