GBP/USD dips as markets eye BoE’s rate decision as a strong USD sets the tone

• GBP/USD is slightly down as the Bank of England’s potential rate hike looms amidst easing inflation signals.
• A hawkish BoE stance could push GBP/USD towards 1.3000 if accompanied by increased inflation and rate hike.
• US Dollar Index strengthens; June Housing Market Index outperforms expectations, rising from 50 to 55.

GBP/USD reverses its course late in the European session amidst a low-volume trading day in the FX space, with US markets closed due to a holiday. A risk-off impulse weighs on the Pound Sterling (GBP), which is set to outperform the greenback, as the Bank of England (BoE) is expected to deliver a rate hike on Thursday. The GBP/USD is trading at 1.2793, down a modest 0.19%.

Investors focus on the potential Bank of England’s rate hike amidst easing inflation, while US housing data exceeds forecasts

European equities closed with losses. The GBP/USD is at the mercy of the BoE’s decision to raise rates after being questioned by politicians to deliver price stability amidst inflationary levels last seen 40 years ago. Nevertheless, it should be said that April’s inflation has shown signs of easing from around 10.1% to 8.7% YoY. Still, the core reading depicts inflation is broadening amongst the Consumer Price Index (CPI) basket components, as it ticks from 6.2% to 6.8% YoY.

The BoE will reveal its decision on Thursday at 11:00 GMT. But one day earlier, May’s CPI readings would be delivered. Market participants estimate the headline CPI to stand at 8.4% YoY, while core CPI is estimated at 6.8%, unchanged from last month’s figures. Further inflation data would be released, with Producer Price Index (PPI) and the Retail Price Index (RPI) estimated to edge lower, particularly the former.

If inflation ticks higher, alongside a 25 bps rate increase by the BoE, it would require the delivery of a hawkish message that convinces the market that additional hikes are expected. In reaction, the GBP/USD is expected to appreciate, and it could challenge the 1.3000 figure.

Across the pond, the Federal Reserve (Fed) kept rates unchanged but foresaw peak rates at 5.6%, according to the dot-plot in the Summary of Economic Projections (SEP). A slew of Fed officials have expressed the likelihood of raising rates at the July meeting. Traders will look to Fed Chair Jerome Powell’s testimony at the US Congress.

In the meantime, the greenback is getting stronger amidst light trading. The US Dollar Index (DXY), a measure of the US Dollar value against a basket of peers, climbs 0.22% at 102.536.

Data-wise, the US NAHB Housing Market Index for June improved from 50 to 55, smashing estimates and, according to the report, the highest reading since July 2022. The report highlighted solid demand and the lack of inventory as the main reasons for the surprising jump.

GBP/USD Price Analysis: Technical outlook

From a technical perspective, the GBP/USD is set to continue to edge higher, with the 1.3000 figure on sight. Given the fundamental backdrop suggeting a more aggressive monetary policy, that should help the GBP/USD pair to surpass the 1.3000 mark, which could exacerbate a rally toward the April 21, 2022, high at 1.3089, followed by 1.3100. Conversely, the GBP/USD could witness further downside below the 1.2800 figure, like the May 2022 high of 1.2772, followed by the 1.2700 figure, ahead of diving to the 20-day EMA At 1.2574.