GBP/USD unchanged after Bank of England says interest rate cuts coming

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Who will cut first? BoE or FOMC

Speculation is rife about whether the BoE or FOMC will cut rates first, with the BoE potentially moving as early as June. Meanwhile, the FOMC’s rate reduction appears likely by September. The Fed is often viewed as the leader of such changes globally and it was previously expected that the BoE would follow the Fed’s monetary policy actions. However, this morning Bailey’s stance affirmed the UK’s decisions do not need to mirror US actions. Separate movements could affect the interest rate differentials between the GBP and USD, thus influencing forex flows and valuation.

The timing of rate cuts could send volatility into GBP/USD

The anticipation of rate cuts by the BoE or FOMC have already introduced some unpredictability in forex markets, with actual cuts poised to provoke strong GBP/USD movements. Bailey’s indication of possible steeper rate cuts than market anticipations can directly affect investment interest in UK assets, potentially leading to swings in demand for GBP and influencing its exchange rate against the USD.

UK GDP data could sway rate cut odds

Looking forward, the UK gears up for its first glance at Q1 2024 GDP data tomorrow morning, and expectations are set for recovery. Any deviation from these expectations could directly affect the BoE’s monetary policy, with weaker-than-expected growth data likely pressuring the central bank to lower rates sooner to stimulate the economy. Conversely, stronger growth could provide room to delay cuts, affecting the GBP/USD exchange rate through changing perceptions of the UK’s economic strength.

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