British pound steady ahead of BoE rate decision

• BoE expected to raise rates at Wednesday’s meeting.

• Powell signals two more rate hikes this year.

The British pound is calm on Thursday. In the European session, GBP/USD is trading at 1.2786, up 0.15%.

It has been a quiet week for the British pound, although I expect to see more movement after the Bank of England announces its rate decision later today.

Will BoE deliver 50-bp hike?

It would be an understatement to say that BoE hasn’t gotten the job down on the inflation front. Wednesday’s inflation release was a painful reminder that the BoE is far away from its 2% target, and the government’s goal of reducing inflation to 5% by year-end would be a significant achievement.

The May UK inflation report was hugely disappointing for BoE policy makers. Headline inflation remained stuck at 8.7% y/y, and even worse, core inflation rose to 7.1%, up from 6.8% in April, the highest level since 1992. On a monthly basis, the core rate fell from 1.3% to 0.8%, but that still translates into an annualized rate of 10%. Inflation seems to be entrenched, despite the BoE’s tightening, which likely means the current rate-tightening cycle will be ‘higher and longer’ than the BoE had anticipated.

The BoE has raised rates over 12 straight meetings, yet little progress has been made on the inflation front. That has raised expectations that the central bank will have to apply tougher medicine in the form of oversize rate hikes, with a 0.50% increase a strong possibility at today’s meeting. If the BoE delivers a 0.50% hike rather than the BoE’s standard 0.25%, the pound should gain ground.

Powell stays hawkish on inflation

Fed Chair Powell told a House Committee on Wednesday that inflation pressures remained high and getting it back to 2% “has a long way to go”. Powell was clear about the Fed’s rate plans, stating “it was a pretty good guess” that the Fed would hike twice more this year. There was nothing really new in Powell’s testimony and market pricing of a rate hike in July remains steady and is currently at 74%, according to the CME’s FedWatch.

GBP/USD technical

• 1.2719 and 1.2645 are providing support.

• There is resistance at 1.2848 and 1.2950.