BOE Preview: GBP/USD Pauses Rally Ahead of CPI and Rate Decision
Capital.com | Jun 20, 2023 09:58AM ET
The GBP/USD has found a new breath in recent days as the currency dominates the FX space heading into the Bank of England (BOE) meeting this Thursday. GBP/USD is hovering around a 14-month high, just under 1.28, after breaking past prior resistance at 1.2675.
On Monday the pair reversed slightly but this is likely to attract a new wave of buyers as the market looks eager to continue pushing towards the psychological 1.30 mark, barring any sudden surprise over the coming days.
GBP/USD daily chart
EUR/GBP has also been feeling the pressure of the bullish Pound as the pair is down 4% from the highs seen in late April, with 1.8% of that move happening during the month of June so far. There seems to be a little more resistance from EUR buyers to let go compared to GBP/USD, and this is likely given Lagarde’s hawkish commitment to continue pursuing their mandate to lower inflation. The pair is now hovering around the lows in December last year where support has appeared at 0.8520, challenging the continuation of the bearish move. A re-test of resistance at 0.86 may be on the cards over the coming days.
But the strongest moves have been in GBP/JPY, which is now at the highs last seen in December 2015, having risen 5.5% in the month of June so far. The pair has found some resistance just above 181.00 but could be broken easily if the bullish momentum in GBP continues, at which point, the 184.50 level comes into play, as this was the previous resistance last time the pair was at these levels.
UK CPI expected to show a continued drop in price pressures.
Before the BOE meeting on Thursday, the latest UK CPI data will be released on Wednesday morning, which will give some insight into how inflation has been evolving. Economists are predicting a drop to 8.5% in headline CPI in May, dropping from 8.7% the month prior, the first-time inflation had dropped below 10% since September last year. The monthly reading is expected to show a significant drop in inflationary pressures in May (0.4% from 1.2%). But core inflation, which excludes volatile prices like food and energy, is expected to remain unchanged on a yearly basis at 6.8%, driven mostly by services inflation and wage pressures, a key worry for economists who expected domestic inflation to remain elevated.
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The day after the CPI release, the Monetary Policy Committee (MPC) will meet to determine the necessary updates to the current monetary policy, with markets expecting another 25bps hike from the BOE (currently priced at a 74.8% probability). It’s hard to envision any other scenario at present, with no hike firmly out of the picture, and a 50bps hike seeming unlikely given current conditions. That said, markets are assigning the remaining 25% probability to a half-a-percentage-point rise.
BOE rate hike probabilities for the June 22nd meeting
Source: refinitiv
I think the argument for a bigger hike was diminished once CPI dropped to 8.7% in April, especially given Governor Bailey and the MPC have been reluctant to hike aggressively if possibly avoided. There is a possibility that the CPI data on Wednesday shows an unexpected rise in inflation, which could force the MPC to act more aggressively, but even then, the chances are slim.
Nonetheless, we could see market expectations shift prior to the meeting given stronger data, which may see a reaction in the Pound in Wednesday’s session. If so, GBP/USD may halt the current reversal as expectations are reshaped, with the pair potentially jumping back above 1.28 and re-testing last week’s resistance at 1.2847.
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