Where to next for the pound as it plunges amid BoE rate cut possibility?​

​​​Outlook for the pound and key levels to watch

​The GBP/USD pair experienced a significant sell-off on Thursday, plummeting to a two-week low of $1.3093 following comments from Bank of England (BoE) Governor, Andrew Bailey. The sharp decline represents a 1.1% drop on the day and over 2% from the recent two-and-a-half-year high at $1.3434.

​From a technical perspective, the GBP/USD pair has fallen through its August-to-October tentative uptrend line at $1.3228, signalling a potential shift in short-term momentum.

​The next key support zone to watch is made up of the 55-day simple moving average (SMA), currently sitting at $1.3057, the September low at $1.3002 and the psychological $1.3000 mark. Failure there would probably indicate that the July-to-September ascent has come to an end and may lead to a descent towards the 200-day SMA at $1.2778 and the August low at $1.2665 taking place.

​GBP/USD daily candlestick chart

​For the bulls to regain control, a decisive move back above the $1.3267 August peak is needed, which could pave the way for a retest of recent highs at $1.3434.

Market expectations shift dramatically on Bailey's comments

​Financial markets swiftly recalibrated their expectations for future interest rate movements following Bailey's interview with The Guardian. The BoE governor hinted at a potentially "more activist" approach to rate cuts if inflation continues to ease.

​This unexpected shift in tone has led traders to fully price in a rate cut from the BoE as early as next month. Moreover, the probability of an additional cut in December has surged to 61%, up from previous estimates.

​Looking further ahead, market expectations now include six rate cuts by the end of 2025, compared to the five cuts projected earlier this week. This dramatic shift in sentiment has put significant pressure on the British pound across various currency pairs.

​EUR/GBP, for example, surged by around 1% from its early October near 2 ½ year low at £0.8311 to this week’s £0.8434 high. It was made marginally below the 55-day SMA at £0.8445 which is expected to at least short-term cap, together with the £0.8463 September high. This resistance area would need to be bettered for a rise to the 200-day SMA at £0.8509 to become possible with perhaps even the August peak at £0.8624 perhaps being back in the frame.

​EUR/GBP daily candlestick chart

The breached August-to-October downtrend line at £0.8380 as well as the 25 September high at £0.8372 may act as short-term support ahead of the 1 October £0.8311 low.

​Significant support below £0.8311 lies between the 21 March 2022 low at £0.8296, the £0.8285 January 2022 low and the £0.8277 December 2019 low. 

Global factors exacerbating sterling's decline

​While Bailey's comments were the primary catalyst for sterling's decline, several global factors are amplifying the currency's weakness. The ongoing conflict between Israel and Iran has increased demand for safe-haven assets, particularly benefiting the US dollar.

​This geopolitical tension has led to a broader risk-off sentiment in the markets, putting additional pressure on riskier assets like the pound. The Dollar Index (DXY) has strengthened as a result, and is currently trying to overcome resistance at 101.80-to-101.85, the 3 and 12 September highs, as well as the July-to-October tentative downtrend line and 55-day SMA at 101.75-to-101.85.

​US dollar index daily candlestick chart

​A weekly chart close above this resistance area on Friday after US non-farm payrolls (NFPs) could point to a significant trend reversal in the US dollar and lead to the Dollar Index heading back up towards its June-to-July lows and 200-day SMA at 103.34-to-103.54.

​Additionally, recent data indicating strength in the US job market has reinforced expectations that the Federal Reserve (Fed) will maintain higher interest rates for an extended period. This divergence in monetary policy expectations between the UK and the US is likely to continue influencing the GBP/USD exchange rate in the coming months.

​Traders should therefore closely monitor upcoming UK economic data releases and BoE communications for further clues on the central bank's policy direction.

Impact on other GBP currency pairs

​The pound's weakness is not limited to its performance against the US dollar or the euro. Other major currency pairs have also seen significant movements which traders should be aware of when formulating their trading strategies.

​Traders should also remain vigilant and consider implementing appropriate risk management strategies, such as stop-losses, given the current volatile market environment.

How to trade GBP currency pairs

​1. Analyse technical and fundamental factors affecting the pound, including BoE policy and global events.

​2. Decide whether to trade GBP through spread betting, contract for differences (CFDs), or other instruments.

​3. Open an account with IG to access forex markets.

​4. Use our advanced charting tools to identify potential entry and exit points.

​5. Place your trade, ensuring you have appropriate risk management measures in place.

​Remember that forex trading carries a high level of risk, and it's crucial to understand the markets and use proper risk management techniques before engaging in currency trading.