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

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

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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