In its May meeting, the Bank of England (BoE) reduced the benchmark interest rate by 25 basis points to 4.25%. This marks the fourth consecutive rate cut since August 2024, aimed at supporting the UK economy amid growing global trade uncertainty.

Additionally, the UK and US reached a significant trade deal on Thursday, which is expected to shift market sentiment as optimism grows around this new agreement.

BoE: Rate Cuts & Policy Stance

With the rate cut widely anticipated, the highlight is on the Bank of England’s (BoE) revised economic projections and its accompanying statement.

In its May meeting, the BoE revised its economic outlook downward due to ongoing trade disruptions:

• 2025 GDP Growth: 1.0% (down from 1.2% in February)
• Unemployment Rate: 5.0% (up from 4.5%)
• Inflation: Expected to peak at 3.5% in 2025, returning to the 2% target by 2026 (compared to February’s projection of a 4.0% peak and 2% by mid-2026)

These adjustments reflect the growing headwinds from U.S. tariffs and broader global uncertainties. While the peak inflation rate is now expected to be slightly lower, the BoE anticipates that inflation will remain above its 2% target for a longer period, delaying the return to its target.

Governor Andrew Bailey emphasized that the BoE’s monetary policy decisions will remain data-dependent, with no predetermined path for future actions.The vote within the Monetary Policy Committee (MPC) showed a shift towards a more dovish outlook:

• 5 members voted for a 25bps rate cut
• 2 members supported a deeper 50bps cut
• 2 members preferred to keep rates steady

This unexpected three-way split underline the committee’s differing views but also increases the likelihood of further easing in upcoming meetings.

UK-US Trade Deal Finalized

On the same day, President Donald Trump announced the finalization of a major new UK-US trade agreement, the first significant deal since the sweeping tariffs were implemented in April.

Key components of the deal include:

• Tariff Reductions: The 25% tariff on UK steel and aluminum exports will be removed, and U.S. auto tariffs on up to 100,000 UK cars annually will be reduced from 25% to 10%
• Agricultural Access: The UK will increase import quotas on U.S. beef, ethanol, and other agricultural products
• Pharmaceutical & Customs Cooperation: UK pharmaceutical products will gain preferential access with reduced regulatory barriers

UK Prime Minister Keir Starmer praised the deal as a move to “save jobs, not conclude negotiations,” suggesting that more agreements may follow.

Market Implications: Sentiment Shift on Pound and Dollar?

Investor sentiment had previously shifted away from the U.S. dollar due to aggressive tariffs, driving capital into the pound (and euro). However, with the BoE’s dovish stance and the recent UK-US trade agreement now priced in, market sentiment appears to be shifting again. 

The pound has weakened against the dollar on Thursday, indicating a potential shift in investors sentiment and the capital flows. 

GBP/USD is under pressure as key technical levels begin to break, suggesting further downside risk.

As noted in our earlier analysis, the potential formation of a Head and Shoulders or Triple Top pattern suggests a possible bearish reversal. With GBP/USD now approaching key support near 1.3270—which also acts as the neckline for both patterns—a decisive break below this level could confirm the bearish setup and signal further downside risk.

Could the FTSE 100 Extend Gains on the Trade Deal?

The FTSE 100 is currently facing resistance near the 8,680 level. While the finalized UK-US trade deal has sparked some optimism in the market, its long-term benefit for the UK remains uncertain—especially if other countries are able to negotiate more favorable terms with the U.S.

UK Prime Minister Keir Starmer described the agreement as a step to “secure jobs, not conclude negotiations,” indicating that further discussions are likely. Additionally, lingering uncertainty over U.S.-China trade talks could continue to weigh on global sentiment, limiting the FTSE’s upside potential in the near term.

The UK100 faces notable resistance at 8,680, with the index pulling back earlier this week. While the broader technical setup appears constructive, the 8,680 level may cap further upside, especially as investor confidence remains fragile.

The next key support lies around 8,450. A break below this level could trigger renewed selling pressure and potentially shift the short-term bias to the downside.