BOE Likely to Keep Distance from Peers

The BOE is expected to keep rates unchanged and maintain its distance from its peers as markets look for a slow easing path forward that could keep the pound buoyant.

BOE Expected to Maintain Status Quo

The BOE is expected to diverge from other major central banks when it convenes on Thursday, retaining interest rates unchanged while the Fed and ECB ease policy. Furthermore, economists and markets predict just one more rate cut this year. Naturally, this is expected to be reflected in the outcome of the upcoming meeting, with a solid majority voting to maintain the status quo and accompanying commentary emphasising inflation remaining above target. All economists in the latest survey foresee no adjustment to interest rates, and 80% anticipate one additional rate reduction later in 2024. A minority envisions two cuts, suggesting that the disagreement on the BOE's outlook centres around the degree of stimulus expected.

Investors have upgraded their view of the BOE, having previously allowed for some probability of a rate decrease at this gathering. However, Governor Andrew Bailey has adopted a more hawkish tone in his public remarks, addressing monetary policy at the Jackson Hole Symposium last month while insisting rates stay restrictive for an extended period. Though headline inflation dipped to a target of 2% earlier this year, it has since rebounded, and the BOE does not forecast it falling to the preferred level until no earlier than 2026.​

Good News is Bad News

The UK economy has seen relatively solid growth this year, which typically leads to higher inflation. Unlike other major economies, wages in Britain have risen ahead of increasing costs, resulting in persistent inflation. Strong commercial activity over the summer months, aided by favourable weather, is also expected to push prices up, especially as the government looks to raise taxes in its upcoming budget, with these costs often passed to consumers.

Should the economy remain relatively strong despite some softening reads in recent data prints, the BOE can maintain a restrictive policy despite peers in the face of ongoing inflation. Traders will watch the voting outcome closely to understand inclinations. The previous meeting saw a narrow vote in favour of an interest rate cut. This time, at least one MPC member is predicted to vote to hold rates, with markets weighing up the possibility of a cut at the next meeting depending on further support for the dovish position held by Swati Dhingra. Unless there is a surprisingly large number of officials voting to cut rates or the Governor moves from emphasising the need to stay restrictive, the pound is expected to be influenced by the potential divergence in interest rates between the UK and US.​

Cable in Wedge Pattern

The GBPUSD pair seems to be moving upwards in a potential ending wedge pattern formation. Should the uptrend persist beyond 1.3268, further resistance may occur at 1.3363 and 1.3430, which correspond to the 138.2

Source: SpreadEx GBPUSD