Bank of England Set to Hike Rates to 5.50% Amid Growing Economic Uncertainty

The Bank of England is widely anticipated to increase the bank rate by 25 basis points (bps) from 5.25% to 5.50% at 11:00 GMT, marking the highest level since 2007. The key question is whether this signals the end of aggressive rate hikes. The BoE might take a cue from the European Central Bank (ECB) and implement a cautious rate hike, acknowledging the growing risks of stagflation.

In Q2, the UK economy surprised with a 0.2% expansion, but economists remain pessimistic, citing delayed effects of higher rates. Unemployment rose to 4.3% in July, with 207K job losses, worsening conditions from June's 66K loss. However, average earnings (excluding bonuses) rose 7.8% YoY in July.

Given the slowing economy and weakening labor market, the BoE could hint at a pause post-hike. Governor Andrew Bailey hinted at nearing the end of the tightening cycle, but Catherine Mann advocated caution to prevent inflation overshooting.

Surprisingly, UK inflation eased, with CPI at 6.7% in August, below expectations. Services CPI also decreased to 6.8% YoY. This might influence the BoE's decision, with markets now pricing in a 57% chance of a rate hike pause, up from 20%. Goldman Sachs expects the BoE to maintain the rate at 5.25% and has revised its terminal rate forecast accordingly.

GBP/USD extended its decline toward the 1.2300 support level, in line with other major currencies, as the dollar gained strength following yesterday's meeting. The outcome of today's Bank of England (BOE) meeting will likely impact the future direction. The next support levels to watch are at 1.2200 and 1.2100, while resistance is anticipated at 1.2400.

Resistance 3	Resistance 2	Resistance 1	Support 1	Support 2	Support 3
1.2580	1.2450	1.2400	1.2300	1.2200	1.2100