The British pound climbed above $1.33 on Thursday, reaching its highest level in over two months, after the Bank of England cut its key interest rate by 25 basis points to 4.25%, in line with expectations, but surprised markets with a more hawkish tone in its accompanying statement.
British pound strengthens after BoE rate cut
While the rate cut reflects progress in disinflation and recent signs of slowing economic momentum, the Bank signaled that monetary policy will remain restrictive for an extended period to ensure that inflationary pressures are fully contained. The MPC emphasized that a gradual and cautious approach to easing is warranted, warning against complacency amid lingering wage growth and resilient services inflation.
Notably, the vote was more divided than anticipated, with two members opting to keep rates unchanged—highlighting internal concerns that premature loosening could risk derailing progress toward the 2% inflation target. This divergence in views prompted investors to scale back bets on the pace and scale of further rate cuts this year. Market pricing now reflects expectations for perhaps one or two additional cuts by year-end, rather than a more aggressive easing cycle previously projected.
Sterling buoyed by positive geopolitical developments
In addition to the Bank’s policy stance, the pound was buoyed by positive geopolitical developments. Reports emerged that President Trump is preparing to announce a comprehensive US-UK trade agreement later on Thursday, potentially covering services, digital trade, and tariff alignment in key sectors such as pharmaceuticals and agricultural goods. Such a deal, if confirmed, could mark a significant step forward in post-Brexit UK trade strategy and bolster investor confidence in the UK’s medium-term growth outlook.
Overall, the combination of a less dovish-than-expected central bank, improved trade prospects, and reduced global interest rate divergence supported sterling’s gains. However, analysts warn that the currency’s upside may be capped if domestic data deteriorate or if trade talks fail to deliver meaningful results.
