Thursday’s London session witnessed a robust performance of the Pound Sterling (GBP), buoyed by heightened investor risk appetite ahead of the Bank of England’s imminent interest rate decision.
This surge was particularly evident in the GBP/USD pair, which experienced a significant rally. The rally was propelled by the Federal Reserve’s decision to maintain its projection of three rate cuts for the year, thereby diminishing investor interest in the US Dollar (USD).
The Bank of England is widely expected to maintain its current interest rates at 5.25%, given the robust growth of the United Kingdom’s core Consumer Price Index (CPI). This index, favored by policymakers to gauge inflation, is currently exceeding the targeted rate of 2%.
Investors will closely scrutinize any indications regarding potential future rate cuts, with prevailing expectations leaning towards a reduction in borrowing rates at the August policy meeting.
The Bank of England’s stance on interest rates may adopt a slightly dovish tone, considering that price pressures have grown at a slower pace than anticipated. In February, annual headline and core inflation figures softened to 3.4% and 4.5%, respectively.
The UK Office for National Statistics attributed this slowdown to decreases in food and restaurant prices, albeit offset by increases in motor fuel costs of particular interest will be the reactions of Monetary Policy Committee (MPC) members Catherine Mann and Jonathan Haskel to the recent softening of inflation figures.
Despite the majority of the MPC opting to maintain rates at 5.25% in the last four policy meetings, both Mann and Haskel have consistently voted for further interest rate hikes.
This bullish momentum has been fueled by a positive market sentiment following the Federal Reserve’s commitment to its projected rate cuts. Despite inflation persisting above expectations in February, the Fed remains steadfast in its stance, linking rate cuts to sustained decreases in inflation.
As the Bank of England announces its interest rate decision, scheduled for 12:00 GMT, market participants anticipate continued volatility for the Pound Sterling.
The consensus expects the Bank to maintain its current interest rates, although close attention will be paid to voting patterns among policymakers, particularly Mann and Haskel, who advocate for further rate hikes.
The Bank of England is likely to emphasize the necessity of confidence in achieving sustainable inflation reduction before considering rate cuts.
However, the recent inflation data from February may bolster their confidence in the trajectory of inflation, potentially initiating discussions on the timing of rate reductions.
Persistent inflation in the UK, driven primarily by robust service inflation fueled by strong wage growth, underscores the importance of monitoring wage growth trends. Investors will closely observe whether earnings continue to outpace the necessary rate of increase required for sustainable inflation reduction to 2%.
From a technical standpoint, the Pound Sterling’s ascent to 1.2800 against the US Dollar signifies a bullish sentiment amid favorable risk conditions.
The GBP/USD pair’s rebound from the Descending Triangle breakout region around 1.2700 reinforces short-term bullish sentiment, supported by trading above the 20-day Exponential Moving Average (EMA) at approximately 1.2740.
Downside risks are mitigated by the Descending Triangle’s lower boundary, while upside potential faces resistance at the seven-month high of around 1.2900.
The Relative Strength Index (RSI) further supports bullish momentum, surpassing the 60.00 threshold, with the potential for continued bullish trends if sustained above this level.
