GBP/USD Forecast: Pound could weaken in case BOE forecasts recession

GBP/USD has recovered a portion of the losses it suffered in the last two days and advanced toward 1.2170 in the early European session on Thursday.

The Bank of England (BOE) is widely expected to hike its policy rate by 50 basis points (bps) to 1.75% following its August policy meeting. The bank will also publish its revised growth and inflation forecasts. Governor Andrew Bailey will deliver his remarks on the policy outlook and respond to questions from the press starting at 1130 GMT.

A 50 bps rate hike by itself could trigger a 'buy the rumour sell the fact' reaction and cause the British pound to weaken against its rivals. In that case, investors will pay close attention to the vote split. If the policy statement reveals that some policymakers wanted to raise the rate by 75 bps, this could be seen as GBP-positive development. On the other hand, the sterling could face additional selling pressure in case markets see that some policymakers preferred a 25 bps hike.

Moreover, the BOE's revised growth and inflation forecasts could have an impact on the pound's performance against its rivals. The BOE already said that there is a risk of the UK economy tipping into recession and if the bank forecasts an outright recession in 2023, the GBP is likely to have a difficult time finding demand. 

Previewing the BOE meeting, "cable could resume its recovery momentum towards 1.2500 if the BOE signals aggressive tightening in the coming meetings, prioritizing inflation over growth concerns," said FXStreet Analyst Dhwani Mehta. "Markets continue to anticipate further rate hikes after this week, as Sterling Overnight Index Average (SONIA) is placed above the 2% mark in September and close to 2.5% in November."

BOE Rate Decision Preview: Bailey to follow Powell’s footsteps with a dovish hike.

GBP/USD Technical Analysis

The Relative Strength Index (RSI) indicator on the four-hour chart stays near 50, reflecting GBP/USD's indecisiveness in the near term.

1.2160 (Fibonacci 23.6% retracement of the latest uptrend) aligns as a key level for the pair. In case this level stays intact as resistance, additional losses toward 1.2100 (psychological level, Fibonacci 38.2% retracement) and 1.2075 (200-period SMA) could be witnessed.

On the upside, stiff resistance seems to have formed at 1.2200 (psychological level, 20-period SMA) ahead of 1.2275 (the end-point of the uptrend) and 1.2300 (psychological level).