The GBP/USD pair experienced a significant drop last week but ended quickly, not as many had expected. Let me remind you that the 1.2690–1.2705 zone is extremely important for the pound and traders. Above this zone, bulls maintain the upper hand and have the opportunity to continue pushing the pair towards recent peaks. Below this zone lies the bears' domain, but on Friday and Monday, we saw that the bears were not particularly eager to take the initiative.
I assume the market wants to avoid opening trades before two crucial events this week. On Wednesday, the UK will release its May inflation report, which may indicate a drop to the target of 2% for the first time in a long while. Is this good news for the pound? More likely not. If inflation drops to 2%, the Bank of England will no longer need to keep the interest rate at its peak. Thus, it might start lowering it soon, which is a bearish factor for the pound.
At the same time, inflation in the UK slowed down in April, March, and February. It has nearly halved over the past three months, yet during this period, the pound either actively grew or held its ground against the dollar. Therefore, traders are not worried that the Bank of England might start easing its monetary policy soon. Perhaps they plan to buy the pound "to the bitter end" and will only start selling it when the Bank of England announces the first rate cut (as with the euro). However, I need clarification on this.
The pound could see new growth tomorrow if inflation slows less than the market expects. A decline is possible if inflation slows more than the market expects. The market currently anticipates a 2% rate. Thus, I think there are good chances for the pound to fall, and a new consolidation below the 1.2690–1.2705 zone could be used to open short positions.
Conclusion:
The trend for the GBP/USD pair has yet to turn bearish. The bears have only made one tentative step in that direction. Therefore, the inflation report and the Bank of England meeting will either help them or crush their ambitions. In the latter case, the bulls might launch a new prolonged offensive. Nevertheless, a decline in the pound is more likely. Traders must understand that a decrease in inflation to 2% signifies the end of the "high rates era." The Bank of England might start lowering rates as early as Thursday. If inflation remains at 2% over the next few months, the British regulator might cut the rate at every subsequent meeting.
Meanwhile, the Fed will continue to wait. Wait for autumn or winter to start their much-anticipated easing program. However, with US inflation at 3.3%, September is the earliest possible date for the first rate cut. Throughout the summer, bears will have the support of the information background. Will they take advantage of it?
