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Abstract: The Bank of England (BOE) is expected to raise interest rates by 50 basis points, and it is not the time to sell the GBP. The BOE will raise interest rates by 50 basis points at its meeting on Thursday, exceeding the market expectation of raising interest rates by 35 basis points according to Refinitiv data, which should boost the GBP in the short term.

Fundamentals

After the inflation data was released, the GBP lost its position as the best-performing major currency in 2023. The GBPUSD once fell to 1.2757, the lowest level since July 10.

The BOE's decision to raise interest rates this year was generally unpopular with the GBP. Three of the four interest rate hikes caused the GBPUSD to fall that day. The EURGBP rebounded four times. At the same time, the seasonal bearish characteristics of the GBP in August are obvious. In the past ten years, the GBPUSD has fallen eight times and the EURGBP has risen seven times.

However, at the meeting in August, if the BOE chooses to raise interest rates by 50 basis points, the GBP may leap jump. Because this rate hike exceeds the current market pricing of 35 basis points.

In addition, for the bulls, the most favorable result of this week's meeting of the BOE for the GBP is that the BOE predicts that the UK will avoid economic recession, and the BOE is "more hawkish" than the European Central Bank (ECB) and the Federal Reserve (both the Federal Reserve and the ECB hinted last week that interest rates may be close to the peak).

The market is indeed uncertain whether the BOE will choose to raise interest rates by 25 basis points or 50 basis points, but excessive austerity will increase the risk of economic recession. The BOE may need to raise interest rates by 50 basis points on Thursday to push up the GBP. The GBP is still recovering from the decline after the weak inflation data released in mid-July. But if policymakers "downplay the need for further tightening", any increase may be short-lived.

It is expected that BOE Governor Bailey will reiterate the BOE's policy of relying on data at the press conference, but this is essentially pushing the problem into the future. Overall, the BOE is expected to emphasize the continued tension in the labor market and open the door to further tightening policies.

Technical Analysis

Since October 2022, the GBPUSD has been on a long-term upward trend and soared to a 15-month high of 1.3142 on July 14. Since then, the GBPUSD has been undergoing a moderate downward revision. As the price has remained under pressure in the past few trading days and benefited from the intensive support of the SMAs, the bulls could restart.

However, momentum indicators suggest that bearish pressure continues to prevail. Specifically, the MACD remains below the 0-axis, while the Relative Strength Index remains below the neutral line of 50 after a series of failed reversal attempts.

If bearish pressure persists, the price could face near-term support at 1.2762 before connecting with the upward-sloping trendline of higher lows since October 2022. Below this level, the GBPUSD could fall towards June support at 1.2590 before testing 1.2445. Subsequently, further declines could stop at the May bottom at 1.2307, which overlaps with the 200-day SMA.

On the other hand, if the latest downside correction proves to be short-lived, bulls could push prices back to the psychological threshold of 1.3000. A break above this range could pave the way for a 15-month peak at 1.3142. A continued break above this level would test the February 2022 resistance at 1.3297.

Overall, the GBPUSD's recent correction seems to be coming to an end as the GBPUSD enters a rebound phase. Therefore, as long as the price stays above the uptrend line, it could extend the bullish long-term structure. It is recommended to buy the dips.

Trading Recommendations

Trading direction: Long

Entry price: 1.2630

Target price: 1.3000

Stop loss: 1.2550

Deadline: 2023-08-16 23:55:00

Support: 1.2742, 1.2712, 1.2593

Resistance: 1.2883, 1.2997, 1.3050