BoE to cut today
The Bank of England (BoE) is expected to cut rates by 25bps to 4.00% today. However, given the mixed signals from recent economic data, we anticipate a three-way vote split, with two members favouring no change and two advocating for a more aggressive 50bps cut. There has not been a single unanimous vote in this cycle and this divergence reflects the tension between persistent inflation concerns and signs of economic slack. Sterling’s reaction may be muted, but we think the balance of risk is tilted to the downside.
With the cut largely priced in, attention shifts to the committee’s forward guidance specifically, whether it will reaffirm its pattern of quarterly reductions or hint at a change in pace. The key uncertainty hanging over this meeting is the risk of a deeper deterioration in the labour market. So far, the evidence points to a gradual weakening rather than a sudden downturn. At the same time, inflation remains persistently high, especially in the services sector, adding another layer of complexity to the policy outlook.
Overall, we expect the August forecasts to closely mirror May’s Monetary Policy Report, with only modest adjustments: inflation steady, GDP slightly higher on reduced tariff drag, and softer labour market projections. The BoE is also expected to address the impact of quantitative tightening (QT) on bond yields. If QT is exerting more upward pressure than anticipated, it could prompt the Bank to consider slowing the pace of active gilt sales.
It’s hard to draw a clear conclusion on whether the BoE will lean dovish or hawkish. What’s more evident is the asymmetry in sterling rate pricing. If the Bank sticks to quarterly 25bp cuts, current market expectations – just 60bp of easing by February – look too shallow. That leaves room for more cuts to be priced in, weighing on the pound via the yield channel. Conversely, if the BoE turns hawkish in response to sticky inflation within a stagflationary backdrop, sterling could still come under pressure. Higher nominal rates may not lift real yields if inflation expectations stay elevated and growth weakens, reducing the appeal of UK assets.
The bottom line is, the pound may be looking at a lose-lose situation here, especially against the euro. Seasonally, we’re also wary that GBP/USD usually falls in the month of August. The pair’s failure to close above the 100-day moving average resistance may be a warning sign.
Two Kevins
While the full extent of the economic damage from the new tariff regime is yet to be seen, the pressure on the Fed to adopt a more dovish stance is unlikely to disappear. This pressure could intensify as President Trump has announced a decision on a new Fed governor will be made “before the end of the week.” He also stated that four people are being considered for the position of Fed chair, including “two Kevins and two other people.” Currently, Kevin Warsh, former FOMC governor from 2006 to 2011, appears to be the front-runner to replace Powell. The prospect of Powell’s successor being known in advance, effectively creating a “shadow Fed,” will likely weigh on market sentiment and the dollar.
Adding to the chorus of concern is Minneapolis Fed President Neel Kashkari, who stated in a CNBC interview that “the economy is slowing.” He suggested it may “become appropriate to start adjusting the federal funds rate,” referring to the central bank’s benchmark rate. Kashkari also highlighted the significant uncertainty surrounding tariffs and their impact on inflation, questioning, “How long can we wait until the tariff effects become clear? That’s just weighing on me right now.” He suggested that making “some adjustments and then we have to pause, or even then we have to reverse course, might be better than just sitting here on hold until we get clarity on tariffs.”
Meanwhile, the 10-year breakeven rate, a key measure of long-term inflation expectations for the Fed, has been steadily climbing since mid-April.
As real yields drop and the yield curve steepens, the dollar is feeling the weight of economic slowdown worries. As the market’s focus shifts from broad macro shocks to specific bilateral agreements, investor attention is increasingly turning toward macro indicators like inflation and growth. Emerging markets, led by China, could provide some of the earliest clues. The recent rally in U.S. assets alongside softening commodity prices underscores rising skepticism about global growth outside the U.S. The soft-landing narrative for the U.S. economy, however, remains a key anchor. If this narrative were to be shaken, it could trigger a rapid shift in market positioning. For now, it remains the primary source of the dollar’s vulnerability, and the market will likely remain cautious before allowing for renewed dollar strength.
Euro’s swift comeback
Last week’s warning that the euro’s slide against the dollar might be short-lived has already played out faster than we expected. EUR/USD posted its strongest daily gain since April following Friday’s soft US jobs report and has climbed another 0.7% this week, reclaiming ground above its 21-day moving average.
The correlation between EUR/USD and short-term yield spreads has surged back to 2025 highs, after fading earlier this year when the euro briefly acted as a haven amid US recession fears. With rate differentials once again steering the narrative, the pair looks poised to catch up, especially if the Fed leans as dovish as markets now anticipate.
Traders are pricing in up to 75bps of Fed cuts by year-end, spurred by weak US employment and services data. Treasury buying and rate-cut hedging have intensified. In contrast, the ECB remains cautious, with swaps showing less than a 50% chance of further easing. Some Governing Council members, including outgoing hawk Holzmann, are pushing back against additional cuts, citing inflation near target and reduced external risks following a new trade deal with the US.
Meanwhile, President Trump’s latest tariff threats have revived policy uncertainty and volatility, raising fears that US growth could take a bigger hit than elsewhere. That’s helping reinforce the view that the euro may offer a more stable alternative to the dollar – a theme gaining traction as rate dynamics shift in the euro’s favour.
Swiss franc under pressure
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: August 4-8
All times are in BST
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
