January Bank of England preview – rates unchanged but pressure to cut rates builds

Threadneedle Street to leave rates unchanged

The Bank of England (BoE), under the scrutiny of investors and market analysts, is expected to maintain its current interest rate position on 1 February.

This anticipation comes at a time when the central bank has consistently maintained a firm stance against any discussions of rate cuts. The Monetary Policy Committee (MPC), the decision-making body within the BoE, has been closely monitored for any shifts in its messaging that could indicate a change in monetary policy direction.

Markets pricing in 2024 cuts

Despite the BoE's tough stance, the markets are currently pricing in four rate cuts in 2024. This forward-looking sentiment suggests that traders and investors are betting on a softer monetary policy approach in the near future.

The rationale behind this expectation is rooted in the recent economic indicators showing a slowdown in inflation and wage growth. These factors are key considerations for the BoE when determining the appropriate interest rate level to achieve its primary goal of maintaining price stability and supporting economic growth.

Housebuilders to benefit from rate cuts?

For traders, the current economic climate presents a unique set of opportunities and challenges. On one hand, the prospect of future rate cuts could stimulate the economy and potentially boost stock prices. Companies in sectors such as housebuilders, which often benefit from lower borrowing costs, could see their stocks rise in anticipation of a more dovish monetary policy. For example, a company like Persimmon, a major UK homebuilder, might see increased investor interest as lower rates could lead to more affordable mortgage financing for homebuyers.

On the other hand, the uncertainty surrounding the timing and extent of any potential rate changes requires traders to be vigilant and adaptable. Fixed-income securities, such as government bonds, are particularly sensitive to interest rate fluctuations. A surprise rate cut or a delay in expected cuts could lead to significant price movements in bond markets, impacting the portfolios of traders who are exposed to these assets.

Technical analysis – GBP/USD

GBP/USD continues to trade sideways below last week’s high at $1.2775 while remaining above Friday’s $1.2676 low. Below it meanders the 55-day simple moving average (SMA) at $1.2649. Further down lies the more significant $1.2613 to $1.2597 area which consists of the late-December to January lows.

A rise above Friday’s high at $1.2758 is needed for last week’s peak at $1.2775 to be revisited. Above it lies significant resistance between the mid-December-to-January highs at $1.2794 to $1.2828.

GBP/USD chart

Technical analysis – EUR/GBP

EUR/GBP’s decline from its £0.8714 December high has taken it to today’s £0.8514 five-month low which lies within the significant June-to-August support zone at £0.8519 to £0.8493. This area is likely to hold but if not, the April 2021 low at £0.8472 would be next in line.

Resistance above Monday's £0.8549 high, which coincides with the December low, can be seen along the December-to-January downtrend line at £0.8562. Whilst it caps, further downside is expected to be seen.

EUR/GBP chart