**GBP/USD and GBP/JPY Vulnerable to Dovish BoE Cut**
*By DailyFX.com*
Sterling bears are tightening their grip on the British pound as traders brace for a potentially dovish turn by the Bank of England (BoE) at the next monetary policy meeting. Renewed speculation regarding an imminent interest rate cut has intensified volatility in GBP/USD and GBP/JPY, with both pairs showing increased sensitivity to shifting policy expectations. As investors refocus on the macroeconomic outlook and central bank guidance, GBP’s outlook remains precarious, particularly against a backdrop of softening UK data and ongoing uncertainty about the inflation trajectory.
### Overview: The BoE’s Delicate Balancing Act
The BoE finds itself at a crossroads. While inflation has moderated since last year’s surges, wage growth remains robust, unemployment is contained, and overall growth has stabilized. Yet, financial markets perceive a dovish pivot may be unavoidable due to mounting evidence of consumption fatigue, cost-of-living pressures, and shrinking business confidence.
– Rate cut speculation has surged after a series of dovish data releases.
– The BoE is expected to weigh domestic economic fragility against the risk of loosening financial conditions prematurely.
– Forward guidance from the Bank will play a pivotal role in shaping Sterling’s near-term trajectory.
### Macro Backdrop: UK Economic Data Turns Softer
– **Inflation Trends**: UK inflation continues to soften, with latest data showing Consumer Price Index near the BoE’s 2 percent target. Reduced price pressures support arguments for a policy easing cycle in the coming months.
– **Labor Market**: Wage growth, although still outpacing inflation, has shown tentative signs of easing. The unemployment rate remains historically low but job vacancy numbers have started to slip.
– **Retail Sales and GDP**: Retail sales growth has decelerated as households grapple with the cumulative effects of higher borrowing costs and persistent cost-of-living challenges. Recent GDP prints suggest a modest rebound after last year’s technical recession but highlight the fragility of the recovery.
– **Business Sentiment**: UK business activity surveys have turned more cautious, reflecting persistent concerns around demand weakness and uncertainty about future interest rates.
This softer macroeconomic outlook provides the BoE with justification to shift slightly dovish, particularly if upcoming data continue to disappoint. Markets are now more attuned to the risk that the MPC may opt for an earlier-than-expected rate cut or at minimum, a dovish tilt in its forward guidance.
### GBP/USD: Downside Risks Build
The GBP/USD exchange rate has come under sustained pressure on the back of changing BoE expectations and a resurgent US dollar. The Federal Reserve’s continued hawkishness—amid stronger-than-anticipated US economic data—has served to widen interest rate differentials, to the detriment of GBP bulls.
#### Technical Analysis
– **Support Zones**: Key support is seen at the 1.2600 psychological level, underpinned by March lows, then at 1.2500, a prior swing low from early 2024. A break below this zone would signal deeper losses.
– **Resistance Levels**: On the upside, immediate resistance is at 1.2700, followed by the 200-day moving average near 1.2770.
– **Momentum Indicators**: Daily Relative Strength Index (RSI) has tipped into bearish territory. Momentum oscillators confirm a shift in sentiment toward the downside.
#### Fundamental Drivers
– Rising expectations of Fed rate cuts later this year have taken a backseat, as recent US economic data suggest the Federal Reserve may hold rates higher for longer.
– In contrast, the BoE is signaling a growing willingness to ease, especially if inflation continues to print below forecast.
– GBP/USD is likely to remain a barometer for monetary policy divergence between the US and UK.
### GBP/JPY: Cross Faces Mounting Headwinds
GBP/JPY has demonstrated notable resilience this year
Read more on GBP/USD trading.