The Bank of England is expected to keep interest rates unchanged for the seventh meeting in a row

• The Bank of England is expected to keep interest rates unchanged.
• Deflationary pressures accelerated in the UK in May.
• GBP/USD faces an initial bullish barrier at 1.2860.

The Bank of England (BoE) is expected to keep interest rates unchanged for the seventh straight meeting on Thursday, despite the recent acceleration of deflationary pressures in the UK and speculation of two interest rate cuts this year.

The Bank of England could send a cautious message

The Bank of England is widely expected to keep its benchmark interest rate at 5.25% after its policy meeting on Thursday. In addition to the interest rate announcement, the central bank will release the monetary policy minutes.

Although deflationary pressures continue well into May, the Bank of England (BoE) appears poised to start cutting interest rates at some point in Q4 in response to services inflation which remains very high (+5.7% y/y vs. +5.3% On an annual basis expected in May).

Furthermore, UK inflation figures saw headline CPI rise 2.0% (down from 2.3%) and core CPI, which excludes food and energy costs, rise 3.5% (down from 3.9%). In addition, this was the first time the CPI reached the bank’s target since October 2021.

In addition, financial markets are now seeing about 45 basis points of easing Bank of England by the end of the year and nearly 30 basis points by November.

In terms of what’s next, the latest inflation readings are unlikely to challenge the Bank of England’s view of an easing cycle starting in the latter part of the year, while a dovish message should not be ruled out, particularly highlighting services inflation and a still-tight domestic labor market. Just out.

Overall, the Bank of England is expected to keep interest rates at 5.25% on Thursday at 11 GMT. The vote is expected to remain 7-2, with some revisions to the accompanying statement. It seems likely that traders will be particularly interested in interest rate recommendations for the August meeting. It is worth noting that the central bank emphasized in its decision on monetary policy in May the importance of upcoming data in formulating decisions related to monetary policy.

Following the bank event on May 9, Bank of England Governor Andrew Bailey stated that future interest rate cuts may need to exceed current market expectations to prevent inflation from falling below target. On Thursday, Bailey noted that even a small interest rate cut by the Bank of England would keep monetary policy in tight territory.

Additional comments from Bank of England officials also saw outgoing Deputy Governor Ben Broadbent, whose final policy decision will be made on Thursday, confirm that there is a possibility of a rate cut in the summer. Broadbent noted that for the Bank of England to justify cutting interest rates, the data must be in line with its expectations. He also stressed that he is paying more attention to the CPI for short-term services when making his decision.

His colleague Megan Green, who noted earlier in April that higher wage growth and the CPI in services pointed to persistent inflation, making near-term interest rate cuts unlikely, has since revised her position. Green reportedly admitted that persistent inflation had fallen, thus omitting the earlier reference to more distant interest rate cuts. Therefore, if upcoming data also indicates that inflation is falling, markets may expect Green to vote in favor of a rate cut at the June meeting, contributing to the cautious sentiment from the previous session.

Previewing the BoE meeting, Rabobank chief macro strategist Stefan Koopman said the BoE’s Monetary Policy Committee is expected to hold the interest rate on hold at Thursday’s meeting. “The vote may be split again, with two members potentially supporting a 25 basis point rate cut. While the MPC is considering a rate cut, current data do not justify such a move. In addition, the political context makes a rate cut Before the election, he added: “We continue to believe that wage growth and services inflation are not yet consistent with a sustainable return to 2% inflation.”

How will the Bank of England’s interest rate decision affect the GBP/USD pair?

Although inflation continues to decline in May, the central bank is unlikely to adopt a more relaxed tone or give a clearer signal about when to raise rates. Rates It may be reduced. With surprises largely excluded, British pound The British Pound (GBP) is expected to remain within its current familiar range for the time being.

Against this backdrop, the GBP/USD pair maintains its constructive bias after convincingly crossing the key 200-day simple moving average (1.2550). FXStreet Senior analyst Pablo Piovano suggests further gains could push the pound to revisit the June high of 1.2860 (June 12). Furthermore, the next target is the 2024 high at 1.2893 (March 8) before the psychological level of 1.3000.

On the contrary, Pablo points out that the return of the selling bias may lead to some corrective moves in the short term. Immediate support lies at the June low of 1.2656 (Jun 12), closely followed by the 100-day and 55-day simple moving averages at 1.2639 and 1.2618 respectively. Hence the 200-day simple moving average at 1.2550. A deeper pullback could put a potential test of the 2024 low at 1.2299 (April 22) on the radar again.