GBP/USD Facing the 50 Daily SMA after Reversal Down Ahead of BOE Hike
GBP/USD has lost more than 450 pips lower in a week, despite the rate hike by the Bank of England which is coming today
The current economic situation, with inflation being a persistent problem and wages data remaining strong, suggests that the Bank of England (BOE) may have no choice but to raise the bank rate by another 25 basis points (bps) in its upcoming meeting this week. This decision is widely anticipated, but the key question will be how much further the central bank needs to act to address inflation pressures.
The expectation of a 25 bps rate hike is fully priced in by the OIS market, with some traders even speculating about a possible 50 bps move. However, the market is likely hoping that the BOE will continue with its recent policy language, indicating a willingness to tighten further in the coming months.
Although the recent softer UK inflation numbers have led to a decrease in the pricing for future rate hikes, traders are still pricing in at least three more rate hikes by the BOE for year-end. This creates risks for the pound, as a deviation from these expectations could lead to a significant market reaction.
If the BOE hints that it may be nearing the end of the tightening cycle, there could be a strong backlash against the GBP, seeing even lower and likely breaking below the 50 daily SMA (yellow). EUR/USD has turned bullish as the GBP is falling faster than the Euro, so we are looking to buy this pair in such a scenario.
On the other hand, if the central bank emphasizes being more data-dependent, markets may not adjust their expectations until the next UK inflation report on 16 August. In conclusion, the risks seem to be skewed to the downside for the pound, as any indication of a less aggressive tightening stance by the BOE could lead to a negative market reaction. Traders will closely watch the central bank’s statement and its future projections to gauge the potential impact on the currency and market sentiment.
GBP/USD Live Chart
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