Money markets raised overnight rates on the UK's monetary easing, estimating the probability of a cut at 20% compared to less than 10% for the Federal Reserve and the European Central Bank (ECB).
That followed remarks last week by Governor Andrew Bailey that rate cuts would be discussed at future meetings as inflation risks have diminished.
Traders are betting that the Bank of England will be able to beat its European and US colleagues to interest rate cuts, a turnaround from previous expectations that the Bank of England would lag behind its peers in 2024.
This is a big shift in market positioning. The UK was expected to be slower than other countries, as inflation remained stubbornly high last year.
In early 2024, at the third meeting of the year, money markets supported two rate cuts from the Fed and ECB, but only one from the Bank of England.
Market conditions are favorable for all three central banks to cut rates by mid-year. The Swiss National Bank surprised the markets by cutting borrowing costs last week.
Bond traders are also preparing for Bank of England policy easing. Although yields on two-year UK bonds are among the most sensitive to monetary policy, they rose six basis points, they have fallen in recent days to their lowest level since early January. This has caused their premium over their German peers to fall to the lowest level in almost a year, indicating a growing chance of an earlier UK move, which could send the GBPUSD currency pair lower.
The final recommendation is to sell GBPUSD for the medium term, provided that the Bank of England officials will confirm their policy easing plans in the coming weeks.
Profit should be taken at the level of 1.2300.
A stop-loss should be set at the level of 1.2930.
This content is for informational purposes only and is not intended to be investing advice.
