GBP/USD Lower But Well Supported As Markets Expect BoE Hike

POUND TALKING POINTS AND ANALYSIS

• GBP/USD has inched a little lower on Monday but remains near fourteen-month highs

• The Bank of England is widely expected to raise rates on Thursday

The British Pound remains close to fourteen-month peaks against the United States Dollar on Monday as markets look to the Bank of England with near-certainty that rates will be going up again this week.

The United Kingdom’s central bank has been particularly concerned to stop inflation expectations from becoming entrenched within the domestic economy. It will announce its June monetary policy decision on Thursday. The markets are looking for another quarter-percentage-point rise in the key Bank Rate, which would take it up to 4.75%. That would be the highest since April 2008.

The decision will come a day after official inflation figures for the UK are released. The broad Consumer Price Index is expected to have risen by a chunky 8.7% compared with May 2022, with the narrower ‘core rate’ gaining by 6.8%. That would be unchanged from April.

As-expected outcomes here will be seen as nailing down a rate rise within 24 hours, so expect to see sterling climb after the data should they meet forecasts. In any case it would seem vanishingly unlikely that the numbers will do anything to dent expectations that rates will rise this week.

Monday doesn’t offer any first-tier economic data likely to affect any major currency, and for sterling the session is likely to be something of a lull before the two major local events later on.

The currency is well underpinned against the US Dollar by expectations that the Bank of England will continue to tighten monetary policy even as the Federal Reserve holds off to gauge the effect of rate hikes it has already made. The UK economy has also performed rather better than some of the more bearish forecasts made at the start of this year predicted. The prognosis that the economy is still running too hot for there to be a meaningful fall in inflation without significantly higher rates should also keep Sterling buyers coming.

GBP/USD TECHNICAL ANALYSIS

GBP/USD soared last week above a well-respected uptrend channel on its daily chart, a channel which in any case was only a continuation of the steady rises seen since the lows of last September.

Bulls are now attempting to close the gap between current levels and a trading band from March 4 - March 22 which now bars progress higher. The Pound will need to break above 1.29513 to get back into that band. That’s some way above the current market and, with strong rises already booked, there may need to be some consolidation before a serious attempt higher can be made.

Still, the previous uptrend channel now offers support at 1.27239, with May 10’s high of 1.26841 waiting just below that, and that’s before we get to Fibonacci retracement support at 1.22507.

Sentiment toward the pair from traders on IG's platform is perhaps unsurprisingly mixed, but there is a clear bias to go short at current levels. Given the clear fundamental support sterling has, this is likely to be no more than a desire to consolidate some gains and it’s hard to see a meaningful reversal for sterling while inflation remains off the leash.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Written by David Cottle, DailyFX