Created on September 19, 2024

• Recent trades have seen the British Pound rise to near $1.33, its strongest level since February 2022, benefiting from the general weakness of the US dollar.
• This followed the Federal Reserve’s 50 basis point cut in US interest rates.
• Also, the Fed signalled additional 50 basis point cuts for this year and 100 basis points for next year.

Meanwhile, traders are preparing for the Bank of England’s monetary policy decision on Thursday. The British central bank is expected to maintain interest rates, although traders expect cuts in November and December, followed by five more cuts in 2025. The easing cycle began in August when the central bank cut borrowing costs by 25 basis points. The annual inflation rate in Britain remained at 2.2% in August, in line with expectations, while services inflation rose to 5.6% as expected. Core inflation also rose to 3.6%, beating expectations of 3.5%. However, both services inflation and the headline rate were below the levels the central bank had forecast for August.

According to Forex Market, the GBP/USD exchange rate is set for volatility as the UK releases its August inflation report ahead of interest rate decisions by the Federal Reserve and the Bank of England. The exchange rate was trading at 1.3165 on Wednesday, just a few points below its year-to-date high of 1.3267.

UK Inflation Data and the Bank of England

According to the Economic Calendar, The Office for National Statistics (ONS) will release the latest inflation report a day before the Bank of England announces its monetary policy decision. Economists expect the data to show that UK headline inflation rose slightly in August. The Consumer Price Index (CPI) is expected to move from -0.2% in July to 0.3% in August. On an annual basis, the CPI is expected to remain at 2.2%. Core inflation, which excludes volatile food and energy prices, is expected to rise from 3.3% in July to 3.6% in August. These figures will come a week after the UK released an encouraging jobs report, showing that wage growth remained strong in July.

If analysts’ estimates are accurate, the figures will reduce the chances of a rate cut by the Bank of England when it concludes its two-day meeting on Thursday. Also, the data will mean that inflation in Britain remains stubbornly high and above the bank’s 2.0% target. Meanwhile, Economists believe a series of rate cuts will follow this week’s pause as the bank works to stimulate a slowing economy. However, some analysts believe the bank will cut rates by 0.25% at this meeting. Refinitiv data shows the odds of a cut have risen to around 35%.                                                                                                        

Some economists favour a cut due to a wet summer, services inflation and recent wage growth figures. Similarly, some analysts believe that a rate cut would help to limit the rise in sterling, which could make the UK an attractive source market.

Before the recent gains in the currency pair, the pound fell in mid-week trading amid growing bets that the Bank of England will be encouraged by the Federal Reserve and cut US interest rates again on Thursday. Money market pricing shows the odds of a second 25bp rate cut by the bank have risen to around 33%, from close to zero just two weeks ago. The odds of a 50bp rate cut by the Fed are clearly having an impact, as markets believe the bank will be inclined to follow the Fed’s lead. Consequently, the shift in expectations is acting as a headwind for UK bond yields and the pound.

Technical forecasts for the GBP/USD pair today:

The GBP/USD exchange rate has been on a strong upward trajectory in the past few months. Technically, it bottomed at 1.2290 in May and then pulled back strongly to a high of 1.3268 in August. Along the way, the pair formed an ascending channel pattern. It also moved slightly above the crucial resistance level at 1.3141, the highest level it reached in July last year. Concurrently, the GBP/USD pair remained stable above the 50-day and 25-day exponential moving averages (EMA) while the Relative Strength Index (RSI) moved slightly above the neutral zone. Also, the pair formed a small double top pattern on the chart, which is a common reversal sign. Therefore, the likely scenario is for the pair to pull back since the rate cut has been priced in by market participants. If this happens, the pair could drop to the next psychological level at 1.3000.

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