BoE set for a second interest rate cut this year on Thursday

• Investors expect the Bank of England to cut its policy rate by 25 bps.
• UK disinflationary pressure gathered further steam in September.  
• The 200-day SMA near 1.2810 holds the downside in GBP/USD. 

Market consensus points to further easing by the Bank of England's (BoE) upcoming interest rate decision on Thursday. The BoE has held rates steady at 5.00% in the previous gathering, but shifting investor sentiment now suggests a possible 25-basis-point cut this week.

No surprises are expected at the BoE meeting

At the bank’s September 19 meeting, policymakers stuck to quarterly rate cuts for now, with a November cut the most likely outcome. Regarding quantitative tightening, the committee voted unanimously to maintain the pace of reducing bond holdings by GBP 100 billion over the next 12 months, which again was in line with expectations.

The only dovish elements were the slight downgrades to Q3 GDP and Q4 CPI, though this is more a case of marking to market, which of course is subject to change depending on incoming data.

Looking ahead, indicators of inflation persistence—labour market tightness, private pay growth, and services CPI—should continue to guide policy.

Back to inflation, the headline Consumer Price Index (CPI) receded to 1.7% YoY in September, while the core CPI (which excludes food and energy costs) eased to 3.2% over the last twelve months, and Service inflation remained elevated at 4.9% from a year earlier.

Following the September BoE event, policymaker Catherine Mann expressed a cautious stance on the likelihood of multiple interest rate cuts in the coming months, emphasizing the importance of keeping policy restrictive.

However, early in October, Governor Andrew Bailey indicated that the Bank of England could take a "more activist" approach to rate cuts if there is continued positive news on inflation. Aligning behind Mann’s approach, Chief Economist Huw Pill stated that the British central bank should adopt a gradual approach when reducing interest rates.

Ahead of the BoE’s meeting, TD Securities analysts noted: “We anticipate a 7-2 majority to cut Bank Rate by 25bps and little change from September's guidance. Incoming growth and inflation data has been softer than the MPC expected in their August projection, but the budget will force some tweaks to the projection (but these will be less positive than markets expect). We do not expect any signal about December's policy decision.”

How will the BoE interest rate decision impact GBP/USD?

Even though the inflation pressure slowed its pace in September, market participants still appear to favour a rate cut at the BoE's monetary policy meeting on November 7 at 12 GMT.

FXStreet’s Senior Analyst, Pablo Piovano, notes that a rate cut could put further pressure on the British Pound, which could see additional downside if GBP/USD falls below its November low of 1.2833 (November 6). In that case, the next contention should emerge at the key 200-day SMA at 1.2811, prior to the July low of 1.2615.

“On the upside, bulls will be initially eyeing the provisional 55-day SMA at 1.3119. The breakout of that region could put a potential visit to the 2024 peak at 1.3434 (September 26) back into focus”, Pablo concludes.