The pound sterling rose above $1.31 as attention turns to UK inflation data and the Bank of England meeting. The BoE is expected to keep interest rates unchanged at 5% next week, with markets pricing in an 80% chance of no change after last month’s 25 bps cut.
The Bank of England will announce its latest monetary policy decision next week. While the central bank chose to deliver an initial policy rate cut of 25 bps at its meeting in August, policymakers also signalled a desire to take a cautious approach in following through on future rate cuts. This somewhat cautious approach is likely to be reflected in next week’s decision, with an expected pause in BoE rates at 5.00%.
Economic data released since the BoE meeting on the 1st of August has generally been consistent with the central bank’s decision to keep policy rates on hold in September, before delivering another 25 bps rate cut in November.
July’s CPI inflation figure did surprise negatively, but services inflation remained high at over 5% y/y. We will see the latest CPI inflation figures for August next week. In terms of economic growth, Q2 GDP figures were broadly in line with forecasts and appear to be consistent with the general view of the UK’s ongoing economic recovery. Although the monthly GDP figures for July were slightly disappointing, more encouraging signs from other economic indicators, such as the continued improvement in manufacturing and services PMIs, led markets to maintain the view that the UK economic recovery could remain intact.
In summary, we think BoE policymakers will take a measured approach to monetary easing until the end of 2024, with only one more rate cut of 25 bps to the policy rate of 4.75%. As such, if we see further and sustained price pressures or other indications that the UK economic recovery may be stalling more significantly, it could tilt the risks towards a slightly faster pace of policy easing towards the end of this year, perhaps through consecutive 25 bps rate cuts at the November and December BoE meetings.
In the FX market, GBPUSD looks to remain predominantly firm. The correction from the short-term high of 1.3264 continued lower to 1.3001 last week, but recovered since then. The initial bias remains neutral this week first. On the downside, a break of 1.3001 will bring a deeper correction to the 50.0% and 61.8% levels of 1.2664 and 1.3264 retracements at 1.2964 and 1.2893 respectively.
On the upside, a strong break of 1.3264 resistance will resume a larger rally to the next 1.3420 projected level, pullback from 1.2298-1.3043 and 1.2664.
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Ady Phangestu
Market Analyst – HF Educational Office – Indonesia
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