UK Inflation Print Cements BOE Hold

Markets are unanimous in expecting the BOE to hold rates steady after recent data came in line with expectations, but traders will be looking for clues that the next rate cut could be brought forward.

Latest UK Developments

• UK August inflation came in unchanged at 3.8% as expected, well above target and paving the way for the BOE to hold rates unchanged.
• The unemployment rate in Britain also met forecasts of being unchanged in July at 4.7%.
• Markets are pricing in no more rate cuts this year but looking for signs of dovishness at the upcoming meeting that could mean pulling forward the potential for further monetary policy easing.

BOE to Hold Amid Still High CPI

The BOE will conclude its policy meeting on Thursday and is universally expected by economists and the market to hold rates unchanged. The last bit of data that the bank had for consideration was Wednesday'sCPI reading, which came in at 3.8%, as expected, but still high. The core rate, however, declined to 3.6% from 3.8% a month ago, but this was also in line with forecasts. A day before, the UK's unemployment rate remained unchanged at 4.7%, as anticipated, despite a slightly more substantial employment change of 323K compared to the 220K forecast. The focus for policy will likely be on the inflation outlook, as the BOE has projected consumer prices to rise later in the year, following Governor Andrew Bailey's warning that the risk of inflation had increased since the last meeting.

Firms are blaming taxes for the rising prices, which are affecting both core and headline readings. This could pose an additional headache for Chancellor Rachel Reeves ahead of the anticipated Autumn budget. High interest rates are seen as a drag on the economy, suppressing revenue for the government and making the hole in public finances bigger. As a result, the Chancellor is under increasing pressure to raise taxes amid expectations that theOBR will cut its productivity forecast for the economy ahead of the Budget announcement. As high long-term gilt rates have caused the pound to fluctuate recently, the developments around the Budget could have a larger impact on cable.

When Will the BOE Cut Next?

Markets are likely to focus on the vote count to get a better understanding of where rates might go. Last meeting sawa "hawkish" cut, with a 5-4 vote split, leaving markets with the impression that the BOE was headed for a pause in its easing cycle. Since then, higher inflation and rising wages have left economists convinced that the BOE will keep rates unchanged for the rest of the year. Futures markets aren't pricing in a rate cut until the first quarter of 2026. At least one more MPC member might join eternal dove Swati Dhingra in voting for a cut at this session, and a higher number could raise hope for the next round of easing to be brought forward.

Cable completed Inverse H&S pattern?

The GBPUSD has been gaining through the early part of the month as the market gets more sure about easing from the Fed. The pair touched highs not seen since July amid pre-FOMC dollar weakness, breaking above a long-standing resistance level near 1.3600, which might be the neckline of a potential inverse head-and-shoulders pattern. The prior swing low at 1.3500 provides support in the short term, with the pattern invalidated as low as 1.3350 (shoulder). The RSI has pulled back from overbought, which might mean the pair still has momentum for another upward push without a divergence formation, opening the door to the recent high of 1.3790. Intermediate resistance sits at the psychologically important 1.3700 handle.

Source: SpreadEx | GBPUSD, 4h