GBP/USD declined on Thursday following a dovish stance from the Bank of England (BoE) regarding British interest rates. Despite the drop, the pair may remain within its current range if markets anticipate similar policy trajectories for the UK and U.S. central banks.

BoE Decision and Market Reaction

Sterling dipped from levels close to 1.27 but held above recent trend lows around 1.2660 after the BoE’s Monetary Policy Committee (MPC) announced a 7-2 vote in favor of holding rates steady. This decision was largely anticipated, with no additional members joining Deputy Governor Dave Ramsden and MPC member Swati Dhingra in advocating for rate cuts.

The bank’s statement indicated that the decision was “finely balanced” for some MPC members. Despite a significant decline in UK inflation, which has reached the BoE’s 2% target, Governor Andrew Bailey emphasized that it was premature to reduce rates.

Shifting Market Expectations

In light of the ongoing decrease in inflation, market participants have adjusted their expectations for potential rate cuts. According to LSEG’s Interest Rate Probability Report (IRPR), there is a 40% chance of a rate cut in August and a 90% probability for a move in September. These odds have increased from about 70% earlier this week.

Looking Ahead: Key Factors and Data Points

• PMI Data: Unless there are unexpected results in the upcoming U.S. or UK Purchasing Managers’ Index (PMI) data on Friday, the focus will likely shift to the following Friday’s U.S. core Personal Consumption Expenditures (PCE) price index. This data point is critical for providing insights into potential Federal Reserve policy adjustments.
• Rate Cut Expectations: With high probabilities for both U.S. and UK central banks to start reducing rates by September, GBP/USD is likely to stay within its current range. The pair’s daily base line at 1.2752 and the June 15 low at 1.2658 are key levels to watch.

Technical Analysis: Key Support and Resistance Levels

Support Levels:

• 1.2660: Recent trend low which acted as a support on Thursday.
• 1.2658: June 15 low, another crucial support level.

Resistance Levels:

• 1.2752: Current daily base line.
• 1.2800: Psychological resistance and a potential hurdle for any upward move.

GBP/USD’s decline following the BoE’s dovish hold reflects a cautious market sentiment. With inflation easing and rate cut expectations rising, the currency pair may remain within its current range. However, traders should closely monitor upcoming economic data, particularly the U.S. core PCE price index, for clues on future central bank actions. This will be crucial in determining whether sterling can break out of its current range or if it will remain tethered near its recent support levels.