GBP/USD edges lower ahead of BoE meeting

GBP/USD is trading at 1.2587 in Europe, down 0.30% on the day.

BoE expected to raise rates by 25 bp

The Bank of England is expected to raise rates today for a 12th consecutive time, with a 25-basis point hike. This would bring the benchmark cash rate to 4.50%. The BoE can’t be faulted for not being aggressive, but it failed to react to rising inflation fast enough and has found itself playing catch-up with inflation. In March, CPI dipped but remained in double digits, at 10.1%. This has led to a severe cost-of-living crisis and the BoE has little choice but to continue raising rates until it is clear that inflation is on a downswing.

The BoE remains optimistic and projected in February that inflation would fall to 3% within 12 months. This may be a bit of a stretch but I expect inflation to fall more quickly as the rate hikes make themselves felt and cool economic activity. The rate hike itself is unlikely to move the dial on the pound, but Bank statement and updated economic forecasts, especially with regard to inflation, could result in a market reaction.

US inflation dips lower

The US inflation report for April showed a small drop, with headline CPI falling from 5.0% to 4.9%. Still, the financial markets were pleased and the US dollar lost ground. Investors appeared to focus on one particular indicator that declined (CPI Core Services Ex-Housing) while ignoring that Core CPI was almost unchanged at 5.5%.

The markets are widely expecting a pause in June, with a 91% probability, according to the CME Group. With the core rate remaining sticky, I am doubtful that the Fed is considering any rate cuts at this stage, although the markets have mostly priced in a cut in September.

GBP/USD technical

• GBP/USD tested support at 1.2573 earlier in the day. The next support level is 1.2475.

• 1.2676 and 1.2789 are the next resistance lines.