The British pound took a nosedive against the US dollar yesterday, as comments by Andrew Bailey cast doubt on the need for further interest rate hikes in the UK. Currently, Bank of England's Governor Andrew Bailey expects inflation to decline considerably this year, questioning the necessity for another rate hike even in the meeting later this month. Giving parliament members a positive signal that inflation is on a downtrend, Bailey stated that falling energy prices and a weakening job market indicate that the interest rate hike cycle is coming to an end. In response, the pound sterling instantly plunged, thus escalating its down move in the bear market.
"I believe we are now much closer to the peak of the cycle as wage growth is slowing down, and the economy is starting to stall, which is a normal reaction to 14 consecutive borrowing cost increases since December 2021," the governor commented.
Despite this, the futures market anticipates the central bank's Monetary Policy Committee to raise interest rates by 0.25 percentage points to 5.5% at its meeting on September 21st. Now the likelihood of a quarter-point rate hike is measured at 82.5%, slightly below the earlier 85%. So, many investors have revised their expectations regarding the central bank's further policy moves.
Speaking before the Treasury Committee members, Andrew Bailey also stated that many economic indicators already signal further inflation deceleration this year. For your reference, the UK's Consumer Price Index dropped to 6.8% in July compared to 7.9% in June. However, this is still far from the target level of 2.0%. "The main questions now are: will we see inflationary expectations continue to decline and how will this impact wage negotiations?" Bailey also highlighted that inflation expectations among consumers and businesses have declined in recent months. This has led to a slower wage increase.
Concluding his remarks, the policymaker pointed to the rise in oil prices last month, which will likely result in inflation acceleration in August. The CPI report is due to be released soon. However, according to Bailey, this will be just a short-term event. Chancellor Jeremy Hunt is on the same page with the Bank of England's Governor.
Immediately following Bailey, BoE Deputy Governor Sir John Cunliffe spoke, warning parliament members that there are indeed mixed signals regarding the future trajectory of inflation. He mentioned that wage growth remained strong despite the decline in inflation. Given that the primary price pressure was driven by the service sector, where activity is now shrinking quite rapidly, we can conclude that inflation in the UK is on track to continue loosening its grip.
Regarding the technical picture of GBP/USD, the pound has been extending its weakness. The British currency may strengthen only after gaining control over the 1.2530 level. If the bulls manage to take out this level, this will revive hopes for a recovery around 1.2560, after which we can discuss a more significant upward surge in GBP/USD towards the 1.2700 area. In case of a drop, the bears will attempt to seize control over 1.2484. If they manage to do so, breaking through this range will hurt the bulls' positions and push GBP/USD towards a low of 1.2440. The instrument will be able to sink as low as 1.2400.
As for today's technical picture of EUR/USD, the bears have slightly loosened their grip. For the buyers to maintain control, they need to stay above 1.0700. This would enable a break back towards 1.0750. From this level, there is a potential to climb to 1.0770, but achieving this without support from major players will be challenging. If the trading instrument dips below 1.0700, I expect robust activity from major buyers. If none shows up, it would be advisable to wait until the 1.0665 low is updated or to open long positions from 1.0635.
