The GBPUSD exchange rate has weakened this week as traders bet on the potential for a UK rate cut.
GBPUSD – Daily Chart
GBPUSD sold off strongly on Friday and can move lower to the 1.2490-1.2500 level.
When policymakers gather on Thursday, the Bank of England will likely hold interest rates for a seventh consecutive meeting. The UK interest rate has reached its highest level in 16 years.
At its last meeting in May, the bank’s Monetary Policy Committee (MPC) hinted at a potential June cut.
“The BoE made it clear that the economic data will determine when it starts to reduce Bank Rate,” said Ruth Gregory at Capital Economics. “And the tone of the incoming data since then has been disappointing.”
Services inflation in the UK is still at 5.9%, more than twice the level that would be consistent with the bank’s 2% inflation target. The employment picture has also been weak in the United Kingdom.
Some analysts are unsure that the BoE would be keen to cut interest rates in the middle of the current election campaign. The UK goes to the polls on 7 July, but the vote looks like a done deal, with the Labour Party set to take over the government.
Most economists expect the banks to keep a similar tone to the May meeting, and analysts at Barclays Bank expect “little to no change in guidance from the MPC this month.”
Interest rates remain 5.25%, and many expect a rate cut nearer August. Much could depend on the May inflation data, set for Wednesday at 2 p.m. HKT. The bank’s target is a sharp fall in inflation from 2.3% to 2%.
Even if the bank does not want to seem like it is influencing voters ahead of the election, a reading around 2% or less could lead to selling in the GBPUSD, with traders likely anticipating consecutive cuts into the year-end.
