Pound Sterling Stabilizes as Investors Await BoE’s Next Moves

The Pound Sterling (GBP) maintains stability with minimal directional movement as investors closely monitor the monetary policy decisions of the Bank of England (BoE). The GBP/USD pair faces uncertainty, reflecting worries about a deepening recession and the aggressive tightening measures implemented by the UK’s central bank to combat persistent inflation. The BoE is poised to raise interest rates for the fourteenth consecutive time in response to the stubborn inflationary pressures.

Having already elevated interest rates to 5%, the BoE is anticipated to implement a further 25 basis points (bps) increase, adding to the inflationary pressure. Contributing factors such as labor shortages and higher food prices have played a significant role in the UK’s ongoing inflation. The possibility of a 50 bps interest rate hike is also being considered by BoE policymakers, given that inflationary pressures in the UK economy are notably higher compared to other G7 nations.

As investors await the BoE’s guidance on interest rate policies, the Pound Sterling remains within a limited range below 1.2900. The BoE’s commitment to achieving its 2% inflation target may signal the likelihood of additional interest rate hikes in the future. The current headline and core Consumer Price Index (CPI) data for the UK stand at 7.9% and 6.8% respectively, and a gradual easing process is expected to bring them closer to the desired levels.

While headline inflation has decreased from its peak of 11.1% to 7.9%, concerns arise due to recent rebounding global oil prices, which could reignite inflationary pressures. Core inflation remains near a 31-year high of 7.1%, primarily driven by higher service costs and a tight labor market.

To combat inflationary pressures, the BoE and UK authorities have engaged with industry regulators to prevent overcharging customers, thereby alleviating the burden on households and anchoring inflationary pressures. Additionally, the UK delegates are expanding their inflation-controlling toolkit to better address the challenges posed by inflation.

Despite concerns about a potential larger recession, the BoE is expected to implement a further 25 bps increase in interest rates, bringing them to 5.25%. A Reuters poll indicates that interest rates in the UK economy are projected to peak around 5.75%.

Market sentiment is cautious as China’s official Manufacturing PMI contracts for the fourth consecutive month, signaling weak demand. Conversely, the US Dollar Index (DXY) approaches 102.00, boosted by strong performance in the US economy during the April-June quarter, leading to expectations of further interest rate hikes by the Federal Reserve (Fed).

In the US, Q2 Gross Domestic Product (GDP) experienced a 2.4% rise amid a tight labor market and increased consumer spending. However, the Q2 US Labor Cost index dropped to 1.0%, potentially easing retail demand and price pressures.

Looking ahead, investors are closely watching for the release of the US ISM Manufacturing PMI data, which is expected to continue showing a contracting trend.