What do UK rate cuts mean for the GBP?

On Thursday, the 7th of August, the Bank of England announced a rate cut down to 4%. This marks the lowest cost of borrowing since March 2023, signifying an attempt to jumpstart the economy.

This is the fifth rate reduction in 2025, undercutting April’s borrowing rate of 4.25%. The rate cut will most directly affect mortgage homeowners, although it represents a reduction in returns for those saving.

The cut was mostly hinted at during previous months, so it didn’t catch traders and investors by surprise. However, most were glad to see a firm confirmation.

The vote was tight, with the majority only being 5-4. Initially, the result was indecisive, with four members opting to hold rates and four voting for the 25-basis-point cut. The ninth member voted for an even more significant, 50-point cut. This triggered a second vote, where the last member tilted the scales in favour of the 0.25% reduction.

The Monetary Policy Committee (MPC) emphasized that this move is targeted at reducing inflation and bringing the economy into a more balanced state.

Inflation has been a significant issue for the UK economy, with numbers constantly exceeding projections. In June, inflation grew to a larger-than-projected 3.6%, marking a 0.2% increase from May.

Interest rates and the forex market

As most forex traders know, financial reports impact the market significantly. Big decisions on a country or bloc level cause significant shifts in balance, and traders are quick to react.

The result of the BoE meeting was already predicted, so this time, the markets reacted somewhat in advance. The GBP had a strong showing leading up to the announcement, carrying that energy with the welcome financial news. A different outcome, which was possible considering the razor-sharp voting margin, could have likely sent the sterling tumbling.

The rate cut has powered the GBP to strengthen against the USD immediately, marking a 0.56% increase in the GBP/USD pair on the same day. Let’s look at some other key GBP pairs, as well as some forecasts about what may be the next steps for the British economy.

GBP/JPY

In a big-picture view, the GBP has sustained quite a strong rally against the JPY. It has been on a steady rally starting in April at 184, with it slowly progressing to the 200 mark in July. It has failed to break the significant resistance point, with markets reacting sharply and pushing it down significantly at the start of April, staggering it towards the 195 mark.

However, the interest rate cuts seem to have been welcome news for GBP. It has steadily been reclaiming losses and seems ready to challenge the 200 mark once again.

GBP/USD

With tariff news front and center in the global markets, the GBP/USD relationship has changed a lot recently. From initial uncertainty, across belief in the dollar dropping, to the UK and US striking a trade deal, the asset has seen a lot of zigzagging.

The pound has lost a lot of ground since July, losing 4.7% against the greenback. Since then, it’s been on a slow but steady downtrend, fueled by tariff news and a relative stagnation in the UK economy. However, some new energy has been injected by the welcome news, and GBP seems intent on challenging some breakpoints in the 1.34 range.

GBP/EUR

In another fairly volatile relationship, both the UK and the EU have been hit hard by US tariff policy, with worse-than-expected outcomes for both entities. Since the start of the year, GBP has struggled to keep up with EUR, sliding from around 1.2 in January to below 1.15 recently.

It’s unlikely to downright impossible for the move by BoE to fuel the markets to regain the heights that the GBP/EUR pair had in January. However, it may help the GBP break free from the slow sloping motion it’s been in for a while.

In total

As expected, the rate cuts have somewhat rejuvenated the struggling GBP. News that encourages spending tends to strengthen markets, especially rate cuts, which business owners and homeowners welcome.

This encourages market spending and, in turn, propels the GBP forwards. However, this is not the only factor to account for. Inflation in the UK is fairly rampant, and if the next report shows it isn’t under control, it could once again harm the GBP in global standings. As of now, inflation rates are doubling the goals of the Bank of England.

On top of that, labour data in the UK has been disheartening for the economy. Job growth is stagnating, and wages are failing to outperform inflation. In such cases, it’s difficult for the market to move, as real-life conditions deteriorate.

The path forward for GBP

As noted, many things are still uncertain for the development of the GBP. It’s clear that the market has reacted well to the interest rate cuts. GBP, broadly speaking, has strengthened in most of its forex pairings, making it a great time for those who got in before the announcement.

However, things could progress in multiple ways. As stated, the pound is facing a lot of pressure in key economic health metrics. Naturally, the interest rate cuts will help those as well, but to what extent is a big question.

If inflation and labour data continues to disappoint, it could trigger panic on the markets. It would signify that, even with help, the UK economy isn’t strong enough to keep pushing forward. This could shake investor belief and create even more trouble for the GBP.

Economists reaffirm this idea, stating that the BoE could either push further with cuts, reaching record lows in order to stimulate the economy, or freeze it at 4% until the end of the year to take a more cautious approach.

Conclusion

The takeaway is that the forex market reacts well to optimistic news, even if the situation surrounding it may indicate danger. In such situations, it’s wise to stay wary since, if the next important batch of news shows limited progress, the situation can turn quickly. GBP pair traders should keep a close eye on the news, as well as interviews with important figureheads from key institutions.

Disclaimer: This information is not considered as investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced, or hyperlinked, in this communication.