Sterling stayed under pressure on Thursday, sending GBP/USD to fresh two-month lows near 1.3200 and below 1.3220 after the Bank of England kept policy unchanged. The Bank Rate was held at 3.75% as expected, while two policymakers backed a rise, with Swati Dhingra joining Huw Pill in that camp. The BoE also cut its inflation forecasts for this year and upgraded its view of underlying growth compared with April’s estimates.
Earlier UK labour-market data were mixed. The unemployment rate slipped to 4.9% in the three months to April from 5%, against expectations of no change, and the economy added 100K jobs versus 148K previously, though ahead of an 80K consensus. Pay growth stayed firm, with Average Earnings Excluding Bonus at 3.4% against a 3.2% forecast, while earnings including bonuses rose 4.4% year on year, unchanged. The dollar gained after the Federal Reserve held rates at 3.50%-3.75%, removed easing-bias language and showed nearly half of board members projecting a hike before year-end.
Policy Divergence Fuels Pound’s Downtrend
We see a clear divergence between the Federal Reserve’s hawkish tone and the Bank of England’s decision to hold rates. This policy gap strongly suggests continued weakness for the British Pound against the US Dollar. Therefore, we are positioning for a further decline in the GBP/USD pair, especially if it breaks decisively below the 1.3200 level.
The dollar’s strength is being driven by the Fed’s forward guidance under its new chair. According to the CME’s FedWatch tool, markets are now pricing in over a 70% probability of at least one Fed rate hike by the September meeting. This expectation of higher US yields is attracting capital and strengthening the dollar.
Trading Strategy and Market Outlook
While the UK’s domestic data, like the drop in unemployment to 4.9% and strong wage growth, is impressive, it is being overshadowed by the BoE’s inaction. The market is interpreting the central bank’s hold as a sign it is less concerned about inflation than the Fed. This makes the pound less attractive than the dollar for now.
In response, we believe traders should consider buying GBP/USD put options with expirations in late July or August. This strategy provides a defined-risk way to profit from a potential move towards the 1.3000-1.3100 range. We anticipate a break below the year-to-date low of 1.3160, set back in March, could accelerate this downward momentum.
This setup is reminiscent of the 2014-2015 period, when similar policy divergence caused a sustained downtrend in the pound. However, we must remain aware that the strong UK wage data could force the BoE to turn hawkish unexpectedly. The next UK Consumer Price Index report will be critical in shaping that expectation.
