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Apr 23, 2025

Currencies

BoE: U.S. Tariffs Pose More Disinflationary Than Inflationary Risk (April 23rd)

Summary

  • Current BoE Interest Rate: 4.50%
  • Rate Cut Probability (May Meeting): ~85%
  • GBPUSD Performance: Surged recently, reflecting USD weakness
  • UK Inflation (March 2025): 2.6% YoY, below forecast (2.7%)
  • Core Inflation: 3.4%, slightly down from 3.5%

Fundamental Factors Affecting the UK Economy

  1. Impact of U.S. Trade Tariffs
    • BoE policymaker Megan Greene: Tariffs more likely disinflationary than inflationary for the UK.
    • Export substitution and trade diversion are likely to weigh on prices.
    • Risks remain: Supply chain re-patterning and global fragmentation could exert upward pressure on inflation.
    • Ongoing tariff tensions reduce growth potential and economic efficiency.
  2. Currency Strength & External Pressures
    • GBP has strengthened vs. USD, which could further ease inflation via cheaper imports.
    • Greene: USD depreciation would be disinflationary for the UK, though the currency outlook remains uncertain.
  3. Labor Market & Fiscal Policy
    • There are no signs of rising unemployment from April’s employer NIC increases and minimum wage hikes.
    • Greene warns of possible labor market shakeout if cost pressures persist.
  4. BoE’s Rate Cut Outlook
    • Markets expect a cut to 4.25% in May, citing a weak growth outlook post-tariffs.
    • Inflation appears to be moderating, but services inflation remains elevated.

Key Takeaway for Traders

  • Short-term: A May rate cut is highly likely, especially with dovish BoE commentary and inflation slowing.
  • Medium-term: Tariff-related disinflationary pressures and a strong GBP could support a more aggressive easing cycle.
  • Long-term: Risks of trade fragmentation and labor market shakeout could challenge the BoE’s path if inflation resurfaces.

GBPUSD – H2 Timeframe

GBPUSDH2_(4).png

When an impulsive move proves strong enough to break the market structure and a trendline, it is typically considered strong. In the case of the price action on the 2-hour timeframe chart of GBPUSD, such an impulse move occurs as a reaction from the weekly timeframe supply zone. The expectation is that the price would seek to retest the confluence region of the supply zone and the trendline resistance.

GBPUSD – H1 Timeframe

GBPUSDH1_(5).png

The 1-hour timeframe chart of GBPUSD shows an elusive SBR pattern, with its supply region in the same area as the 2-hour bearish impulse. The logical conclusion is to look for an entry to go short GBPUSD.

Analyst’s Expectations: 

Direction: Bearish

Target- 1.31730

Invalidation- 1.34366

CONCLUSION

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Trading foreign currencies on margin involves significant risks and may not be suitable for everyone, as high leverage can increase both potential gains and losses. Before entering the foreign exchange market, it is essential to evaluate your investment goals, personal experience, and risk tolerance.

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Adetola-Freeman Ogunkunle

Author: Adetola-Freeman Ogunkunle

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