GBP/USD Extends Losses as BoE’s Bailey Raises Questions About Further Hikes

GBP/USD Analysis

The Bank of England has been hiking non-stop since the December 2021 lift-off, in order to combat the high cost of living, having delivered 515 basis points of tightening. Although the economy has performed better than expected, growth is anemic and this week's PMIs underscored its precarious position. Along with higher borrowing and mortgage costs from the elevated rates, some trepidation probably sets in.

Policymakers may need to tread with caution and inflation is coming down, so the end may not be far. Testifying in the Parliament on Wednesday, Governor Bailey reiterated the view that the decline in inflation will be "quite marked" by the end of the year. ^[1]

He also said the bank is "much nearer now to the top of the cycle". Making things more interesting, he clarified that he is not saying they are at the top, because "we've got a meeting to come". Not only he signaled that the end of tightening is close, but one can reasonably deduce from his wording that the BoE may stop hiking after this month's upcoming meeting.

However, Mr Bailey had made similar remarks during his May testimony, noting that "we are nearer to the peak than we were", but officials ended up reaccelerating the pace of tightening not long after that ^[2]. Inflation is still too high and pay growth at historical highs, keeping pressure on the BoE for more tightening.

GBP/USD runs its second straight negative month, as resilient US economy and hot labor market - despite sign of softening - don't allow the Fed to declare victory and help the greenback. Governor Bailey opened the door to the end of hikes yesterday and the Pound drops further as a result, testing a the pivotal confluence of the 200Days EMA and the 50% Fibonacci of the 2022 low/2023 high advance. This makes it vulnerable to 1.2307, although bears will likely need fresh impetus for a test and deeper fall.

On the other hand, the BoE still has more work to do on inflation, while the Relative Strength Index (RSI) points to oversold conditions at the current critical tech levels. This could help GBP/USD react, but does not inspire confidence for challenging the EMA200 (1.2690) and the upside is unfriendly from that level on.

The two central banks have adopted a non-committal and data dependent stance, creating uncertainty around the policy outlook. The incoming releases and the policy decisions due in two weeks, will determine the trajectory of the pair.