Sterling sharpens losses to three-week trough on interest rate gap

Sterling fell in European trade on Friday against a basket of major rivals, expanding the gains for the third straight day against the dollar and plumbing three-week lows, on track for the second weekly loss in a row as a US-UK rate gap emerges.

As expected, the Bank of England cut interest rates to two-year lows, with Governor Andrew Bailey welcoming the US-UK trade deal, which reduces uncertainty.

The Price

The GBP/USD price fell 0.25% today to $1.3212, the lowest since April 17, with a session-high at $1.3253.

The pair lost 0.35% on Thursday, the second loss in a row as concerns about a UK recession diminished amid developments in trade negotiations.

Weekly Trades

The pound is down 0.45% so far on the dollar this week, on track for the second weekly loss in a row.

BOE

As expected, the Bank of England cut interest rates by 25 basis points to 4.25%, the lowest since March 2023, marking the fourth such UK rate cut since the current cycle of policy easing started in August 2024.

The rate cut was an attempt to protect the UK economy from any potential negative impact due to US tariffs.

The vote split was unexpected, with 5 members voting in favor of the cut and 2 voting in favor of a deeper 0.5% cut, while two voted in favor of holding rates unchanged.

Markets expected all nine members to vote in favor of cutting rates to 4.25%.

The BOE said it’ll continue to monitor the path of inflation locally and internationally to decide on the appropriate policy response.

Bailey

Bank of England Governor Andrew Bailey said the monetary policy isn’t on an auto pace, and will develop in response to economic changes.

He said the new US-UK trade deal could help reduce uncertainty but won’t change the current outlook radically.

UK Rates

The odds of a UK 0.25% interest rate cut in June stood at 30%.

Now investors await important UK inflation, unemployment, and wages data to gather more clues on the path ahead for policies.

Interest Rate Gap

Following the policy meetings this week, the interest rate gap between the US and UK grew from nothing to 25 basis points in favor of the US, undermining the pound.

Trade Developments 

The US and the UK announced a new trade agreement, the first of its kind with the new US administration.

According to the deal, the 10% base reciprocal tariffs on UK goods will continue, but 25% tariffs on British cars will be reduced to 10%, while 25% tariffs on UK steel and aluminum will be scrapped.

The UK will reduce tariffs on a range of US goods from 51% to 1.8%, while raising beef and ethanol imports from the US by $5 billion a year.