GBP/USD forecast: BoE hike expected on Thursday

“[The BoE] is in a much tougher spot [than the Fed]– stagflation. Markets are less certain with around 25% chance of a pause implied. But the broad consensus is that the MPC votes for another 25bps hike to take the Bank Rate to 5.50%. Governor Bailey told the Treasury Select Committee on Sep 6th: ‘I think we are much nearer now to the top of the cycle,’ and then expressed concern that if the BoE hikes too far then it might need to cut too quickly. So the message is ‘higher for longer, but not too high to warrant pricing in cuts, lads!’

Inflation data is out on Wednesday and this could be critical. There is a chance of a surprise in the data that moves the market ahead of the decision announcement on Thursday – even if it doesn’t actually move the needle for the MPC. Back to Bailey’s comments: ‘It is possible that we will get a tick up in the next [inflation] release, because fuel prices went down in August last year and up a bit in August this year" before concluding "but I do not see that as essentially changing the path. Actually, that is in our forecast.’”

“Economists are near unanimous in forecasting a 25bp Bank of England rate hike on Thursday. This would take the Bank Rate to 5.50%. However, the market has massively scaled back expectations for any future tightening and will therefore be very interested in the BoE's statement as to whether language like the following is retained: 'If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required.'

What happens in the August UK CPI - data released tomorrow - will also have a bearing.

We are sure that the Bank of England will have looked with interest as to how the euro reacted last week after the ECB effectively said that its tightening cycle was over. Any hints on Thursday that the UK policy rate was something like 'sufficiently restrictive' would most like hit the pound. We are slightly negative on sterling later this year on the view that the 2024 BoE easing cycle will be larger than currently priced. But we will take our cue on the timing of this sell-off from Thursday's BoE statement.”

“UK markets have a fair bit to contend with this week – CPI on Wednesday and the BoE policy decision on Thursday. A ‘dovish hike’ a la ECB would pressure the GBP and, at the margin, add to price pressures. The GBP is soft but intraday price action is – right now – showing some signs of relative strength via a bullish outside range session on the six-hour chart. If the GBP can sustain gains through 1.24, a deeper squeeze may develop towards 1.2450 resistance. A clear move above this point is needed to indicate more GBP strength. Support is 1.2375.”

“GBP will likely remain a positive carry winner within G10 in the short term. But this may turn quickly once the BoE pivots dovish, with Citi analysts forecasting a recession in H1 2024 and a significantly more dovish BoE path. Questions surrounding the resilience of the UK economy beyond Q3’2023 make sterling vulnerable as market economists attach a significantly higher probability of a recession to the UK next year than the US or the euro zone.”