The British pound continues to lose ground against the US dollar as market expectations have split regarding the Bank of England's next move in its monetary policy. Some traders are now confident that the committee members are nearing a turning point in their fight against inflation and may signal a more cautious policy in the future. Currently, the market estimates a roughly 62% chance that the Monetary Policy Committee will opt for a 25-basis-point interest rate hike, raising the key rate to 5.25%. The remaining 38% of market participants anticipate a second consecutive 50-basis-point increase following the central bank's unexpected hike in June. If this occurs, the British pound may have a chance to recover after a prolonged slump triggered by last week's data on strong US GDP growth.
Traders use recent news of decreasing inflation in the UK as an argument for a softer policy. However, it is important to understand that it remains significantly higher than in other developed countries and substantially exceeds the central bank's 2% target. According to the latest report, the CPI fell to 7.9% in June from 8.7% in May, while core inflation, which excludes prices of energy, food, alcohol, and tobacco, stayed at 6.9% year-on-year. However, it retreated from a 31-year high of 7.1% recorded in May this year.
Recent data from the British Retail Consortium showed that the annual shop price inflation fell from 8.4% in June to 7.6% in July and dropped for the first time in two years on a monthly basis. This suggests that the country has passed the peak of the cost-of-living crisis, which may now start to recede.
Those advocating for another 0.5% rate increase argue that the British economy can withstand the rising cost of borrowing. The latest data shows that despite 13 consecutive rate hikes by the Bank of England, the UK's GDP remained steady in Q2. Now, it is expected that the UK will avoid falling back into recession.
However, most analysts agree that after today's interest rate hike, whatever it may be, the peak rate of 5.75% is still quite achievable by the end of the year.
Notably, last week, the US Federal Reserve and the European Central Bank raised rates by a quarter of a point but maintained a cautious tone. The regulators emphasized that inflation was moving in the right direction, but it still remained above the target.
As for the technical picture of GBP/USD, pressure on the pound sterling remains high. Only the BoE's decision may affect the situation. The pair will rise only when bulls gain control over 1.2735. This action will strengthen hopes for a recovery to the area of 1.2780, after which we can talk about a more abrupt surge to around 1.2840. If the pair declines, bears will try to take control of 1.2680. If they manage to do this, breaking through this range will affect all bulls' positions and push GBP/USD to a low of 1.2630 with the prospect of falling to 1.2590.
Meanwhile, pressure on the euro surged. To regain control, buyers should climb above 1.0950. This will allow them to reach 1.1000. From this level, the price can climb to 1.1040, but doing this without the support of major traders will be quite difficult. In the event of a decrease, buyers will become active only around 1.0910. If they failed to do so, it would be good to wait for the low of 1.0870 to be updated or open long positions from 1.0835.