The British pound is in a difficult position as many traders anticipate decisive action from the Bank of England this week. Most economists predict that the UK's central bank will lower rates for the first time since the pandemic began at its meeting this Thursday. The current key interest rate is 5.25%.
Unlike previous monetary easing cycles, the UK economy is expected to gain momentum this year and next, posing the risk of continued inflationary pressure. The silence of Bank of England Governor Andrew Bailey since May has left analysts guessing how the nine-member Monetary Policy Committee will balance the risks of rising wages and prices against the risk that the highest rates in 16 years could stifle the country's nascent economic growth.
It is clear that the Bank of England is unlikely to give clear guidance on the future rate path or signal the start of a sustained rate-cutting cycle. This will force traders and investors to focus on data, similar to what is happening with the European Central Bank and the US Federal Reserve.
Even if the Bank of England lowers the rate on Thursday, neither markets nor analysts expect it to be quickly followed by further cuts. Investors have priced in only two quarter-point cuts this year, while the central bank has noted that easing on Thursday will still leave rates in restrictive territory.
The MPC may also be divided on how to proceed, with some economists expecting a 5-4 split in favor of a cut. Some officials, including Chief Economist Huw Pill, as well as Jonathan Haskel and Catherine Mann, have recently pointed to persistent price pressures, especially in services inflation and wage growth. A new inflation outlook will accompany the decision.
Economists note that a cautious approach to future cuts in the UK will echo the European Central Bank's decision, which kept borrowing costs unchanged earlier this month after easing policy in June. Traders lean towards another rate cut in the eurozone only in September.
Labor market conditions also support easing, with UK unemployment recently rising by 200,000 to 4.4% and the number of vacancies decreasing.
Regarding the current technical outlook for GBP/USD, buyers need to overcome the nearest resistance at 1.2875. This will allow targeting 1.2910, above which it will be quite challenging to break through. The furthest target will be the area around 1.2935, after which a sharper rise to 1.2970 can be expected. In case of a decline, bears will try to regain control over 1.2850. In case of success, breaking this range will deliver a significant blow to the bulls' positions and push GBP/USD down to a low of 1.2830, with a prospect of reaching 1.2800.
As for the EUR/USD pair, buyers need to focus on taking the 1.0870 level. This will allow targeting a test of 1.0895. From there, it could climb to 1.0920, but this will be challenging without support from major traders. The furthest target will be the 1.0940 high. In case of a decline, I expect significant bullish activity around 1.0845. If there are no major buyers, it would be wise to wait for a new low at 1.0825 or open long positions from 1.0805.
