Sterling holds lower ahead of the BOE later today


GBP/USD is down 0.4% to 1.2300 on the day while EUR/GBP is up 0.3% to 0.8665 at the moment. The former is down to its lowest levels since early April as price threatens to break the 25 May low of 1.2308 currently:

GBP/USD daily chart

The downside shove in cable this week continues after the softer UK inflation data yesterday. And from a technical standpoint, it continues the retreat following the break below the 200-day moving average (blue line) in trading last week.

As we head towards the BOE decision later, traders are seeing it as being a coin flip of a decision really. The odds of a 25 bps rate hike were sitting at ~50% at the start of the session but are now seen at ~57%, though I would still classify it as being 50-50 at best.

Mind you, before yesterday, a rate hike was supposed to be a certainty and so the indecisiveness here speaks volumes about sterling sentiment at the moment.

In any case, I still expect the BOE to hike the bank rate one more time today. Considering the state of the economy and where inflation levels are, they should raise rates so long as they can still get away with it. Otherwise, if they are seen doing too little, they may not get this same opportunity in the months ahead should the economy worsen much more rapidly from hereon.

I reckon that’s a gamble the BOE can’t afford to take and so, the lesser of two evils – should they be wrong – would be to overtighten than not tighten enough in the battle against inflation.

That being said, I would still argue to sell the pound on rallies especially against the dollar now after the Fed yesterday.

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