GBP/USD was flat at $1.2703 after falling to session $1.2621, but an extended selloff depends on risk-off trading conditions intensifying over the summer period, triggered by “the US credit downgrade and ongoing move higher in long-term bond yields,” MUFG said in a Thursday note.
The Bank of England, or BoE, raised interest rates by 0.25% to a 5%-to-5.25% range on Thursday, a downshift from the 0.5% hike delivered in June.
The 6 to 3 vote split revealed that there “was a strong consensus view amongst the monetary policy committee to deliver a 25bps rather a 50bps hike today,” MUFG added, following recent data showing easing inflation pressures.
The central bank noted that inflation “remains well above the 2% target,” though expects it to “fall significantly further, to around 5% by the end of the year.”
The Bank of England left the door open to further rates and warned that rates will remain high, but with signs of division among BoE monetary policy committee members and optimism that inflation will continue to ease, market participants cut their bets on how many more hikes are ahead.
“We are revising our Bank Rate forecast and now look for just one more 25bp hike to 5.5% in September,” NatWest Markets’ chief UK economist, Ross Walker, said in a note.
Bets on the BoE’s terminal rate have been falling for weeks – following the cooling inflation data seen in June – and now stands at 5.75%, well below expectations of around 6.5% in early July.
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