The GBP/USD pair experienced an increase in the previous session and is currently adjusting to 1.3403. The pound reacted favorably to the Bank of England’s choice to maintain interest rates at their current level, as market participants concentrated on the regulator’s insights regarding the potential impact of the Iran conflict on forthcoming policy decisions. The Monetary Policy Committee reached a unanimous decision to pause (9-0), marking a significant change from the more divided 5-4 vote in February. Certain members have recognized the potential for upcoming rate increases. The Bank of England has taken a cautious stance, opting to observe the situation closely given the considerable uncertainty present. Although the decision to pause rates was largely expected, there has been a significant shift in market expectations. Until recently, rate cuts were anticipated; however, the surge in oil prices due to the Iran conflict has heightened inflationary risks and shifted sentiment towards a more hawkish policy approach.
The Bank of England projects that inflation may rise to 3.5% in the upcoming quarters and emphasized the potential risk of inflation expectations becoming firmly established within the economy. Concurrently, indicators of an economic deceleration remain evident, potentially limiting price escalations; however, the predominant concern currently revolves around inflation. Recent labour market data has indicated a deceleration in wage growth, reaching its lowest level since late 2020. Unemployment holds steady at 5.2%, while employment indicators suggest a trend towards stabilisation. In typical scenarios, such data could lead to a more tempered approach; nonetheless, the prevailing geopolitical landscape and high energy costs have brought inflation concerns to the center stage. The Bank of England’s position continues to exhibit a degree of caution. The ongoing rate pause suggests that the likelihood of policy easing is decreasing, which in turn restricts the pound’s potential for appreciation.
On the H4 GBP/USD chart, the market is establishing a wide consolidation range centered around 1.3354, presently reaching up to 1.3467. A decrease to 1.3333 is anticipated in the short term, with a new consolidation range expected to emerge after this adjustment. A breakout to the upside would set the stage for a continuation wave targeting 1.3494, whereas a breakout to the downside would indicate potential movement towards 1.3133. This scenario is validated by the MACD indicator, with its signal line positioned above zero and demonstrating a strong upward trajectory. The H1 chart indicates that the market has established a tight consolidation range centered around 1.3424. A downside breakout has commenced a wave structure targeting 1.3333. If this level is broken, a further decline towards 1.3125 could occur. On the other hand, a breakout to the upside from the range may initiate a growth wave targeting 1.3494. This scenario is validated by the Stochastic oscillator, which has its signal line positioned below 80 and is decisively trending downward towards 20.
The positive response of GBP/USD to the BoE’s unanimous decision to hold indicates that the market acknowledges the increasing inflation risks, influenced by geopolitical tensions and elevated energy prices, which are constraining the potential for policy easing. The Bank’s prudent approach and the unanimous decision lend some backing to sterling, while the transition from expectations of rate cuts to the possibility of rate increases has adjusted market sentiment. As geopolitical developments take precedence and technical indicators suggest further consolidation, the near-term trajectory of sterling will likely depend on whether inflation concerns persist in overshadowing indications of a domestic economic slowdown.