FX.co ★ GBP/USD. August 5. Will the pound recover?

The Bank of England did what it had to do – it lowered the repo rate for the first time since the pandemic from 5.25% to 5%. However, a legitimate question arises: Why didn't it do this earlier? Inflation has been frozen at the target level of 2% for the second month in a row, but only 5 out of 9 members of the Monetary Policy Committee voted for the rate cut. Nevertheless, that was enough to cause GBP/USD quotes to plummet towards 1.27, after which they found a bottom following the U.S. labor market statistics for July.

According to Andrew Bailey, the inflationary pressure has eased enough for the BoE to lower rates. However, the central bank must ensure that prices remain low to avoid too rapid and intense a cycle of monetary expansion. Shortly after, Chief Economist Huw Pill expressed a similar view. He cautioned financial markets against expecting a quick continuation of monetary easing and noted that efforts to curb inflation were not yet complete, as companies were still raising prices.

The Bank of England's verdict was not unexpected for the markets: both derivatives and Bloomberg experts anticipated this move.Meanwhile, the regulator's measured rhetoric and dedication to a data-dependent approach helped establish a support level for GBP/USD. Moreover, disappointing statistics on American employment weakened the U.S. dollar's positions.

The Bank of England's reluctance to rush was evident in its forecasts as well. The BoE expects stronger GDP growth of 1.25% in 2024 compared to the previous estimate of 0.5%. Economic growth is expected to slow to 1% next year. These figures are incomparable to the bold claims made by the victorious Labor Party in the elections, which promised to accelerate GDP growth to 2.5%. To achieve this, significant fiscal stimulus would be required, which is hardly expected with the serious budget deficit left by the Conservatives.

The central bank forecasts CPI to accelerate to 2.7% by the end of the year, which may explain its intention to move at a slow pace on the road to monetary expansion. Meanwhile, the market's belief in the Fed's aggressive monetary policy easing gives GBP/USD bulls hope. Derivatives predict more than an 80% probability of a sharp 50-basis-point cut in the federal funds rate in September.

Such a move by the Fed and all subsequent ones appears overly aggressive, potentially linked to the looming recession. This is bad news for the pound, which uses its yield advantage compared to other G10 currencies to compete with the U.S. dollar in the race.

Technically, on the daily chart, GBP/USD is experiencing a pause after a downward retracement. If the bulls manage to break through supports at 1.282 and 1.284, a Three Touches pattern will be activated, forming the basis for establishing long positions.