Pound Sterling forms thin red line before chieftains of Threadneedle street

• The Pound Sterling prints red bars lower on traders’ screens ahead of the Bank of England meeting. 
• The bank is expected to leave interest rates unchanged, the Minutes and voting will be keenly eyed. 
• Recent inflation data was mixed despite the headline rate hitting the BoE’s 2.0% target. 

The Pound Sterling (GBP) trades marginally lower on Thursday just above the 1.2700 mark against the US Dollar (USD), ahead of the Bank of England (BoE) policy meeting, a key event for GBP pairs. 

The BoE sets interest rates in the UK, which influence demand for Pound Sterling. Higher interest rates tend to appreciate the Pound by attracting more foreign capital inflows; the opposite is true of lower interest rates. The decisions of the BoE, therefore, heavily impact the Pound. 

Pound Sterling awaits BoE decision 

The Pound Sterling drops off a bit against the US Dollar as traders anticipate the big event for the day, the announcement of the BoE’s policy decision at the conclusion of its June meeting. The announcement is scheduled to take place at 11.00 GMT. The accompanying statement and meeting minutes will offer more background detail on the bank’s stance, as well as the division of voting. These in turn may impact the outlook for the future path of interest rates and, therefore, impact the Pound Sterling. 

The market consensus is for there to be no rate cuts and a 7-2 split in the voting, with 2 favoring a cut. It is very rare for the BoE to change interest rates during an election campaign. BoE Governor Andrew Bailey himself said a rate cut at the meeting was, “neither ruled out nor a fait accompli”. 

Despite UK Consumer Price Index (CPI) inflation data showing a fall to the BoE’s 2.0% target in May, higher inflation in other pockets of the economy continue to keep policymakers away from voting for a cut, with a first rate cut not likely until August. 

“​​Over in the UK, there was another important milestone yesterday, as CPI inflation fell exactly in line with the Bank of England’s target, reaching +2.0% in May as expected,” says Jim Reid, Global Head of Macro Research at Deutsche Bank. “However, some of the details of the report were less favorable, as core CPI was higher at +3.5%, while services inflation surprised on the upside at +5.7% (vs. +5.5% expected), and that’s one of the stickier categories. As a result, investors dialed back the chance that the Bank of England would cut rates by the August meeting, with the chance falling from 52% to 34% by the close.”

On Thursday morning, Swiss Franc traders were handed some volatility to play with after the Swiss National Bank (SNB) decided to cut interest rates for the second time in a row to 1.25%. The decision, however, was widely expected, with two-thirds of economists polled by Reuters prior to the event saying they thought the SNB would cut. Still, the SNB decision does not particularly serve as an accurate barometer of what to expect from the BoE.  

Technical Analysis: Pound Sterling lacks direction after breakdown runs out of steam

GBP/USD is pulling back after breaking below the (red) lower trendline of a rising channel. From a technical perspective, the trend in the short-term is unclear and the pair could either break lower or just as well recover. 

GBP/USD Daily Chart

The sharp decline which saw GBP/USD break out of the bottom of the channel could be a sign the short-term trend is reversing. However, the lack of follow-through lower after the break cautions traders against getting too bearish. 

A break below the 1.2657 level (June 14 low) would provide more evidence of a change to a more bearish short-term trend, with an initial target coming in at 1.2601, the extension of the height of the move prior to the break below the channel, extrapolated lower. 

On the other hand, a break above the 100 Simple Moving Average (SMA) at 1.2740 could indicate the resumption of the prior uptrending bias, with a target at the underside of the channel at circa 1.2775.