GBP/USD Outlook: BOE Rate Cut Odds Fade as UK Inflation Stays Hot

The Bank of England (BOE) cut interest rates by 25bp to 4% earlier this month, though Governor Andrew Bailey stressed that future moves will be “finely balanced.” That balance has now tilted towards no cut at the upcoming September 18 meeting, with UK inflation data running hotter than policymakers anticipated.

View related analysis:

UK Inflation Pressures Remain Stubbornly High

Core CPI climbed to 3.8% y/y, nearly twice the BOE’s 2% target, with prices also rising 0.2% m/m — the sixth consecutive monthly increase. Headline CPI also reached 3.8% y/y, while the core retail price index (RPI) rose to 4.7% y/y and 0.4% m/m.

These readings underscore the persistence of UK inflation, making it difficult for the BOE to justify further cuts in the short term. For the British pound (GBP/USD), this backdrop supports a near-term bid, as markets reduce expectations for rapid policy easing.

Chart prepared by matt Simpson – data course: ONS, LSEG

Core CPI rose to 3.8% y/y, nearly twice the BOE’s 2% target

Sixth consecutive monthly increase in core CPI at 0.2% m/m

Headline CPI also up to 3.8% y/y

Core RPI rose to 4.7% y/y, or 0.4% m/m

BOE Rate Cut Odds Diminish on OIS Curve

Odds of further BOE cuts have diminished according to the overnight index swap (OIS) curve. The 1-year OIS has risen to 3.97%, just 3bp below the current BOE cash rate of 4%, signalling markets expect rates to remain close to current levels. The 1-year forward also sits at 3.84%, implying only a 60% probability of a 25bp cut within the next year. Meanwhile, the 3-month OIS at 3.97% prices just a 16% chance of a cut by November.

Chart prepared by Matt Simpson – data course: SONIA, LSEG

GBP/USD Technical Analysis: British Pound vs US Dollar

The daily chart shows that the British pound delivered a solid rally from the 200-day EMA in early August, with GBP/USD rising 3.5% by the current month’s high. Resistance was met around the monthly R1 pivot and 1.3584 high, and GBP/USD has since retraced from that area of resistance. However, the retracement is shallow in comparison relative to the rally that preceded it.

Prices are currently holding above the 20 and 50-day EMAs, and if a swing low forms then we could be looking at an inverted head and shoulders bottom. Traders should however keep in mind that Jerome Powell’s speech at the Jackson Hole symposium is the main even of the week and potentially the month and quarter. And GBP/USD runs the risk of falling further should the Fed remain more hawkish than President Trump would like.

GBP/USD daily chart showing a shallow retracement after rallying from the 200-day EMA, with potential inverted head and shoulders formation. Resistance near 1.3584; traders eye Jackson Hole risk for direction.

Chart analysis by Matt Simpson - data source: TradingView GBP/USD

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-- Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge

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