GBPUSD Drops 0.4% Ahead of BoE 📉

💡 Rising inflation and geopolitical uncertainty will likely encourage the Bank of England to maintain rates.

The Bank of England is almost certain to keep its policy unchanged at its March meeting. Inflation remains high, and geopolitical uncertainty surrounding trade policy changes further increases the risk of inflationary pressures. For this reason, we expect the key interest rate to remain at 4.5%.

Key Points Ahead of Today’s Decision:

• Analysts’ consensus points to maintaining the reference rate at 4.5%.

• Expected vote split on holding vs. cutting rates: 7-2-0.

• Core inflation rose to 3% in January from 2.5% in December, exceeding the BoE’s February forecast by 0.2 percentage points.

• On the other hand, wage growth and services inflation came in below expectations, although they remain high (6.1% for private sector wages and 5% for services inflation).

• Short-term inflation increases and rising trade policy uncertainty pose significant risks to CPI projections but do not alter the long-term outlook for rate cuts.

• So far, the UK has avoided radical changes in tariffs.

• The market expects the BoE to start easing monetary policy in May and to lower rates to 3.75% by the end of the year (from the current 4.5%).

The voting pattern within the BoE suggests that rate cuts are becoming the dominant stance rather than prolonged tightening, which could impact the pound's performance against other currencies in the long run.

In the short term, however, the market is unlikely to see immediate rate cuts. Inflation has rebounded too quickly, and wage growth remains strong, limiting the potential for a sustained decline in price pressures.

What to expect from GBPUSD?

The market's base scenario is that the BoE will hold rates steady and provide cautious comments regarding its policy outlook. Governor Andrew Bailey has warned that the UK will not be immune to the effects of US tariffs, even if it is not directly targeted. He also cautioned against overinterpreting recent voting shifts within the BoE, after an unexpected change by one official led investors to increase bets on further rate cuts.

We expect the BoE to maintain a hawkish tone, considering macroeconomic data, which could theoretically support an upward trend in GBPUSD. The most crucial support level in the medium term remains the 200-day EMA (golden curve on the chart), which has historically been a key barrier to the downtrend.

Source: xStation5