Pound Under Pressure, BOE Rate Cuts Stir USD/GBP Volatility

The British pound has become one of 2025’s more sensitive major currencies as the Bank of England edges into an easing cycle while the economic outlook remains fragile.

After holding interest rates steady at 4.5% in March, the Monetary Policy Committee moved in February and again in May to trim Bank Rate down to 4.25%, citing substantial progress on disinflation and weaker growth momentum.

Those cuts leave U.K. policy still restrictive, but they mark a clear shift toward normalization after a prolonged period of high rates.

Markets are now trying to anticipate how far and how fast the BOE will go.

Some strategists, including at TD Securities, expect as much as 125 basis points of total cuts over the year, far more than what is currently priced in. That gap between market expectations and more aggressive forecasts creates fertile ground for volatility, particularly in USD/GBP, where moves in relative interest-rate expectations translate quickly into price swings.

If investors begin to price a deeper easing path, the pound could face sustained downward pressure against the dollar.

Domestic politics and fiscal policy are adding to the mix.

Ahead of the Autumn Budget, implied volatility in sterling spiked sharply as traders sought protection against potential surprises, pushing short dated options pricing to levels not seen since earlier episodes of market stress.

After the budget, markets increasingly leaned toward the view that a December 2025 rate cut was highly likely, reinforcing the sense that the BOE is now on a cautious but real easing trajectory, even as it insists decisions will remain data-dependent.

For USD/GBP, the result has been sharper intraday moves and a more fragile trend structure. Every inflation print, jobs release and BOE speech is now a catalyst, as traders adjust positions around a moving target for the terminal rate. If U.S. policy also shifts toward easier conditions, the pair could become a tug of war between two central banks backing away from tight policy at different speeds.

In that environment, the pound is likely to remain a currency where macro surprises and rate cut speculation drive outsized reactions and where complacency can be punished quickly.