FX.co ★ Is there any chance of a 50-point Bank of England rate hike?

After the disappointing UK inflation report that just came out, many analysts are talking about a possible surprise from the Bank of England. There is logic in this speculation. If inflation is not declining and, in this case, the core is rising, what else is there to do? The Consumer Price Index sharply fell in April, giving hope of fulfilling the promise of BoE Governor Andrew Bailey and Prime Minister Rishi Sunak to cut inflation in half by the end of the year. And yet we found out that it still has not slowed down in May. And it turns out that over the past 7 months, during which the BoE has been actively tightening monetary policy, inflation has fallen by 2.4%. It seems that things are not going as well as we expected.

I would also like to highlight core inflation, which does not include energy and food prices. Oil and gas prices have dropped significantly in the last 2-3 quarters. Therefore, if core inflation is rising, headline inflation is actually falling due to the decline in energy prices, not due to the central bank's aggressive policy. And core inflation is not even sharply falling. Based on this, we can assume that the central bank will have to maintain a tight monetary policy to simply achieve a decrease in inflation, and talking about returning to 2% in the foreseeable future is meaningless. In the European Union, they expect inflation to reach the target level by 2025, and it is projected to be 6.1% there. It's slightly lower, but the time period over which it may return is impressive. It may take even longer in Britain.

I believe that the decrease in inflation in the EU and Britain is strongly linked to the fall in oil and gas prices. Based on this, the current interest rate levels are definitely not enough to keep inflation on track towards 2%. And then the question should be posed differently: up to what level are both central banks willing to raise rates? As we have learned from previous articles, there are already doubts about maintaining a tight monetary policy this autumn. There have been few comments from the members of the BoE's Monetary Policy Committee. But we may receive new information on Thursday and let's hope it will help clarify this question. As the British pound continues to enjoy increased demand, there is a presumption that the market expects continued borrowing growth in Britain without restrictions. But in reality, this may not be the case. I would say that the pound is currently benefiting from excessive market confidence that does not correspond to the actual situation. Ending wave 3 or around the 161.8% level would be quite fair.

Based on the analysis conducted, I conclude that a new downtrend is currently being built. The instrument has enough room to fall. I believe that targets around 1.0500-1.0600 are quite realistic. I advise selling the instrument using these targets. I believe that there is a high probability of completing the formation of wave b, and the MACD indicator has formed a "downward" signal. You can sell with a stop loss placed above the current peak of the presumed wave b.

The wave pattern of the GBP/USD instrument has changed and now it suggests the formation of an upward wave that can end at any moment. It would be advisable to consider buying the instrument only if there is a successful attempt to break above the 1.2842 level. You can also sell since the first attempt to break through this level was unsuccessful, and a stop loss can be set above it.