The Pound Sterling (GBP) is cautiously moving – it is roughly around the 1.3400 level against the US Dollar (USD) ahead of the Bank of England’s (BoE) soon to be announced rate decision at 11:00 GMT. Hedging movement traders think the BoE will keep their rate at 4.25% with a likely split of 7-2, as the central bank weighs the effect of easing inflation against ongoing geopolitical risks.
If BoE policymakers Swati Dhingra and Alan Taylor continue to push for easing monetary policy as they did when they voted for deeper rate cuts, then Governor Andrew Bailey stated that decisions will need to be made gradually and with a great deal of caution. Service sector inflation is still cooling but global commodity energy prices are again rising..
Middle East Conflict and Fed Hawkishness Support USD
Markets remain jittery in light of the increasing risk of US military involvement in the ongoing Israel–Iran war. A Bloomberg report outlines that Washington is preparing for a potential strike on Tehran, leading to safe-haven flows being directed to the USD, with additional negative implications to currencies exposed to risk (Pound and others).
At its last meeting, the Federal Reserve held the fed funds rate flat at 4.25%–4.50%, with controlled interest rate cuts still signaled to begin in 2025. However, the Fed projection for the 2026 interest rate was increased to 3.6% (from 3.4%). The Fed also expressed the potential for longer-term inflation risks from new tariffs and global strife. Fed Chair Jerome Powell clearly outlined the potential for stagflation risks and mentioned that the fed funds cuts could be delayed if inflationary pressures were to continue.
UK Economic Data Suggests Dovish Shift Possible
Recent UK data shows a softening labor market and cooling wage growth, partly due to higher employer social security contributions. Notably, services inflation, a key BoE metric, fell to 4.7% from 5.4%, giving doves more ammunition to argue for a rate cut.
However, with geopolitical energy shocks looming, BoE officials may opt to wait for further clarity before adjusting policy. Investors will closely watch Andrew Bailey’s press conference for any hint on how the BoE views the inflationary impact of the Middle East crisis.
GBP/USD Technical Outlook
The Pound has broken below the 20-day Exponential moving Average (EMA) at 1.3480, which puts bearish near-term bias for the currency. The 14-day Relative Strength Index (RSI) is sitting near 40, and a drop below this level could invite further downside momentum.
The key support areas are 1.3400 and 1.3250, and the resistance levels are found at 1.3480 and 1.3630. Barring any unanticipated hawkish statement from the Bank of England, GBP/USD is susceptible to pullbacks into deeper territory and is particularly vulnerable to geopolitical risks such as the looming possibility of military action by the U.S. in Iran.
Conclusion
With the BoE preparing for its June policy decision, the Pound is cautiously trading ahead of the announcement as global uncertainty builds. Inflation is cooling, but geopolitical risks in this environment are heating up. With the GBP/USD path more uncertain than normal, traders should beware of surprises from both Bailey’s press conference and any updates in the Middle East region; both have the potential for volatility.
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