The Bank of England will keep the repo rate at 3.75%, but its new economic forecasts and rhetoric are much more important. Due to confidence in slowing inflation, it will deliver dovish remarks. Let’s discuss this topic and make a trading plan for the GBP/USD pair.
The article covers the following subjects:
Major Takeaways
- The futures market expects a repo rate cut by April.
- The Fed will maintain rates until June.
- Different monetary policy speeds are harmful to the pound.
- Short trades on the GBP/USD pair can be considered with targets of 1.35 and 1.342.
Weekly Fundamental Forecast for Pound Sterling
While the ECB is impressed by the resilience of the European economy to tariffs and concerned about the slowdown in consumer prices, the Bank of England has a different outlook. Inflation in the UK is the highest among the G7 countries, and GDP slowed significantly in the second half of the year. Unemployment jumped to 5.1% in the fall, exceeding the BoE’s December forecast of 5% at the end of 2025, which increases the likelihood of monetary policy easing and puts pressure on the GBP/USD pair.
UK Unemployment Rate
Source: Bloomberg.
MPC hawks are concerned about rising prices, while doves are worried about the deteriorating labor market. The decision to lower the repo rate to 3.75% at the end of last year was made by a vote of 5 to 4. In February, only 1 of 32 Bloomberg analysts expected a cut, and the futures market estimated the chance of continuing the cycle of monetary expansion at less than 1%.
The compromise within the Committee is the reason for this. The hawks agreed to wait for consumer prices to slow to the 2% target announced by Andrew Bailey, which is expected in April or May. The Bank of England governor refers to Rachel Reeves’ budget decision to abolish climate and social levies on households and freeze rail fares.
Forecasts for UK Inflation Rate
Source: Bloomberg.
If inflation does begin to fall rapidly, the BoE will have a free hand to lower the repo rate. The derivatives market puts the odds of monetary policy easing in April at 70% and the scale of monetary expansion at 35 basis points in 2026. This reflects confidence in one move and a 40% probability of a second act before the end of the year.
The decision to keep rates unchanged in February is expected to be taken by seven votes to two. If there are more than two doves, revised inflation forecasts are lower and unemployment forecasts are higher, the decline in GBP/USD quotes may accelerate. The futures market forecasts a cut in the federal funds rate only in June, so the Bank of England’s sharp cut in the repo rate in April will spell doom for the pound.
This scenario is favorable for a calm market, when investors focus their attention on macroeconomics and monetary policy. However, if Donald Trump does something extraordinary again, the Senate rejects Kevin Warsh’s nomination for Fed chair, or the Supreme Court rules on the legality of US tariffs, everything could be turned upside down.
Weekly Trading Plan for GBP/USD
Regarding the GBP/USD pair’s reaction to the Bank of England meeting outcome, the decline in the pair’s quotes on the eve of the event suggests that most negative factors have already been factored in. Thus, traders may start selling the pound on rumors and buying it on the news. Nevertheless, a rebound will create an excellent opportunity to sell the UK currency at a higher price with the targets of 1.35 and 1.342.
This forecast is based on the analysis of fundamental factors, including official statements from financial institutions and regulators, various geopolitical and economic developments, and statistical data. Historical market data are also considered.
Price chart of GBPUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance broker. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2014/65/EU.
According to copyright law, this article is considered intellectual property, which includes a prohibition on copying and distributing it without consent.
