GBP/USD Price Analysis: Higher Policy Rates Spur Flight to Safety

• The Bank of England surprised markets with a 50bps rate hike.

• The market anticipates the adverse impact of higher rates on the UK economy.

• Britain’s inflation rate remained unchanged at 8.7% compared to the previous month.

Today’s GBP/USD price analysis is bearish. After experiencing an initial surge in a volatile trading session on Thursday, the pound declined against the dollar on Friday. Surprisingly, the Bank of England raised rates by 50bps. 

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Higher interest rates generally positively impact currencies. However, the concern that they might lead to an economic slowdown has prompted investors to seek safe-haven assets, such as the US dollar.

Joe Tuckey, head of FX analysis at Argentex, stated that despite the immediate positive reaction to the hike, the pound might struggle to make progress. The market anticipates the adverse impact of higher rates on the economy.

Before the announcement, traders indicated a roughly 50% probability of a 50 basis point increase and a 50% probability of a 25 basis point hike. Currently, the market predicts a 66% likelihood of a 25 basis point rise at the next BoE meeting in August. Moreover, a 34% chance of a 50 basis point hike exists. Furthermore, rates are expected to peak at 6% in December, slightly higher than the earlier estimate of 5.9%.

On Wednesday, the pound weakened against the dollar after data revealed that the inflation rate remained unchanged at 8.7%. Money managers interpreted this data as an indication that the task faced by the Bank of England would be more challenging than initially anticipated.

GBP/USD key events today

Investors will get a report on the US services sector showing the level of business activity, which is expected to drop. A decline could indicate the impact of the Fed’s aggressive monetary policy.

GBP/USD technical price analysis: Prevailing bearish sentiment

On the charts, GBP/USD is testing the 1.2700 support after bulls failed to trade above the 30-SMA and the 1.2800 resistance. The bearish bias is new, as the price recently broke below the SMA, with the RSI pushing below 50.

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Consequently, a break below the 1.2700 support would strengthen the bias. This would allow the price to make a lower low. Furthermore, it would allow bears to target the 1.2600 support level.

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