There is a relative calm on the currency market. Traders are in no hurry to open large positions as they prepare for the meetings of the central banks of the world's leading countries. The focus is on the Federal Reserve, which will announce the results of its September meeting on Wednesday. But besides the Fed, other central banks, including the Bank of England, will also voice their positions. In anticipation of this event, the GBP/USD pair continues to slide down, setting new price lows. For example, today, the pair dropped to the 1.2360 mark, a level it last touched in May of this year. Looking at the weekly GBP/USD chart, we can see that the British pound has been losing ground for ten consecutive weeks. The downward trend is accompanied by fairly wide corrective pullbacks, but overall, bearish sentiments clearly dominate.
Recall that the Bank of England raised the interest rate by 25 basis points in August, thus justifying market expectations. Two out of nine members of the Committee (Mann and Haskel) voted for a 50-point rate hike, while Swati Dhingra voted to maintain the status quo. Commenting on the decision, the head of the central bank, Andrew Bailey, focused on the side effects of aggressive policies. He stated that the central bank had "encountered some unpleasant surprises" in the previous reporting period, so when making the rate decision, the committee members "considered all existing risks." The pound reacted negatively to this rhetoric as it had a "conclusive" character.
There is still intrigue surrounding the September meeting. However, all the most likely scenarios do not favor the pound. For example, according to some experts, the Bank of England may still raise the rate by 25 basis points this month. In support of this position, they point to the high level of inflation, which persists in the UK, even with a downward trend. It is worth noting that on Wednesday, a day before the Bank of England's meeting, key data on British inflation growth for August will be published. According to forecasts, the overall consumer price index in annual terms may accelerate to 7.1% after five consecutive months of decline. In monthly terms, the index is also expected to show growth (0.7%) after dipping into negative territory in July. The core consumer price index is expected to decrease minimally, to 6.8% (from the previous value of 6.8%).
If the above indicators come out at least at the forecast level, the likelihood of an additional rate hike in September will increase. But there is one caveat. According to many currency strategists, if the Bank of England decides to tighten monetary policy this month, it will be the last rate hike in the current cycle. The accompanying rhetoric of the central bank will have a corresponding "conclusive" character. In this case, the pound will share the fate of the euro, which has also depreciated despite the unexpected interest rate hike by the European Central Bank.
According to other experts, the Bank of England is likely to adopt a wait-and-see stance in September, but at the same time, it will signal that if inflation accelerates, the regulator will resort to countermeasures. Supporters of this scenario argue their position with the weak growth of the British economy. Last week, it was announced that the UK GDP contracted by 0.5% in July on a monthly basis (the worst result since December 2022). In quarterly terms, the indicator also remained in the red, rising by 0.2% against an expected growth of 0.4%. It was also revealed that industrial production in July decreased by 0.7% on a monthly basis, with a forecasted decline of 0.4% MoM. This is also a multi-month low, the worst result since August 2022. In annual terms, the volume increased by 0.4%, with a forecast of 0.7% growth. The volume of manufacturing production decreased by 0.8% MoM (the weakest reading since August of last year).
Such grim figures may strengthen the dovish sentiments among the committee members. However, in this case, much will depend on the dynamics of August inflation (the corresponding release will be on September 20).
Thus, at the moment, there are two main scenarios: 1) a 25-point rate hike + hints at the end of the cycle; 2) keeping the rate unchanged + "routine" statements that the central bank may tighten monetary policy if inflation accelerates. Both options are not in favor of the British currency.
In my opinion, the only chance for a turnaround in the GBP/USD pair is a weakening of the greenback. If the Federal Reserve puts pressure on the U.S. currency with its cautious approach (i.e., if it does not announce a rate hike in November), buyers of the GBP/USD pair may seize the initiative and return to the middle line of the Bollinger Bands indicator on the daily chart (namely the level of 1.2550). However, if the greenback remains afloat after the September Fed meeting, GBP/USD bears will strengthen their positions again and head towards the 1.23 mark.
It is advisable to open short positions on the pair only after the price consolidates below the support level of 1.2350 (the lower line of the Bollinger Bands indicator on the D1 timeframe). In such a case, the next targets for the downward movement will be the levels of 1.2300 and 1.2250 (the lower line of the Bollinger Bands on the weekly chart).