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The Bank of England will hold its monetary policy meeting on June 20, and the rate is expected to remain at the level of 5.25%. This meeting will not be accompanied by updated forecasts, so the market may show a somewhat muted reaction.
Since the previous BoE meeting, macroeconomic indicators have generally been slightly better than expected – GDP growth in Q1 increased by 0.6% against a forecast of 0.4%, and wage growth remained high, aided by a recent increase in living wages. Inflation data for May will be published on Wednesday, revealing a significant disparity between the services and goods sectors. Prices for goods was in negative territory in April, while prices in the services sector are slowly decreasing, having fallen to only 5.9% in April, which is still quite high.
After the announcement of early elections in the UK, all speeches by Committee members were canceled, so there are no comments, and markets are relying on their own forecasts. The Conservative Party is highly likely to lose the elections to the Labour party, which would allow for a review of the budget and rate outlook. Markets are currently anticipating the first rate cut in August and will be looking for confirmation of their forecasts on Thursday, with a 60% probability of another cut this year. Two BoE cuts would correspond to two Federal Reserve rate cuts, and these expectations are already priced in, so there are no grounds for significant movements at the moment.
The pound is one of the few G10 currencies for which investors continued to accumulate long positions against the dollar. According to CFTC data for the reporting week, the net long position increased by $0.4 billion to $3.9 billion. Despite this, the price, primarily due to the bond market, has lost momentum and is trying to turn downwards, although it remains well above the long-term average.
A week ago, we expected the pound to rise further, but the pair followed the general trend and retreated after reaching a 3-month high, just shy of the resistance at 1.2892. The pullback was deep; however, there are few grounds for further decline unless May's inflation data brings surprises. We expect the pair to trade sideways until Wednesday, with the BoE's meeting on Thursday providing clarity on rate forecasts, after which the pound may resume its upward movement. The closest target is still the local high of 1.2892, and moving towards the next resistance at 1.3040/60 will require at least one strong factor, which may appear this week.
It's also important to consider the possibility that the Committee may take a more dovish stance, which could be reflected in the number of votes for an immediate rate cut (currently projected: 7 for maintaining the rate and 2 for an immediate cut). If this happens, the pound could become weaker and consolidate below 1.2630/45, aiming for 1.2580.
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