Investing.com | Jun 18, 2024 10:00
This week, the Bank of England (BOE) meeting on Thursday takes center stage. While the consensus expects no change in interest rates, a surprise cut remains a possibility.
However, the bigger story may be a dovish shift towards a potential rate cut in August, after the UK general election.
The primary driver for a potential rate cut is the UK's falling inflation. Forecasts suggest it may reach the Bank's 2% target as early as May's upcoming readings. This decline creates a strong argument for a dovish stance from the BOE.
With the upcoming general election, the BOE is likely to hold rates steady to avoid influencing its outcome.
However, investors should focus on the accompanying statement and voting outcome (expected 7-2 to hold). Any deviation from this could signal a dovish shift and potentially trigger volatility in GBP/USD.
Central bank policies are a major force shaping currency pair trends. Take the example of USD/JPY. Its strong upward trajectory is fueled by the Bank of Japan's ultra-dovish stance compared to the Federal Reserve's aggressive rate hikes. Similarly, EUR/USD has seen a sharp decline since the European Central Bank's first rate cut earlier this month.
If the BOE adopts a dovish tone while the Federal Reserve remains hawkish, it could lead to a medium-term downward swing in GBP/USD. This potential divergence in monetary policy creates a trading opportunity for those who anticipate a weaker British pound.
Last Wednesday, US inflation data triggered a brief surge in GBP/USD, suggesting a potential northward move. However, buyers ran out of steam near the 1.2850 resistance zone, leading to a reversal. Sellers have since pushed the pair down to test the key support cluster around 1.2650.
A break below this support could pave the way for a further decline towards the 1.2470 level. However, for a more significant downward trend, the BOE would not only need to cut rates but also signal a commitment to a more dovish monetary policy cycle.
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