Cable catches a bid on "hawkish cut" as gilt yields rise

Rate Cut and Pound’s Surge

The Bank of England (BoE) delivered an expected Christmas rate cut, reducing the rate from 4.00% to 3.75%, yet the market reaction is surprisingly not dovish. The divided Monetary Policy Committee (MPC) and guidance indicating that rates are nearing the bottom have helped propel the pound (GBP/USD) higher. Following the announcement, the pound jumped about 35 pips to 1.3394, but later faded to the 1.3375 level.

Rising Gilt Yields and Market Response

The fixed-income market responded, with UK 2-year Gilt yields rising 5 basis points from pre-announcement levels, as the 'hawkish' tone forced a repricing of the economic outlook up to 2026. Initially, back-to-back rate cuts in Q1 were being considered, but the BoE's warnings about a December inflation hump have lessened these expectations.

Impact on FTSE 100 and Economic Outlook

The FTSE 100 index is edging lower, unwinding gains made in anticipation of the cut. The sudden strength of the pound is providing a drag on larger companies earning in USD, while the BoE's downward revision of Q4 GDP growth to 0.0% from 0.3% adds to market sentiment concerns. Moving forward, attention now shifts to the ECB rate decision, which is not expected to bring changes.