GBP/USD pauses ahead of Bank of England rate decision

GBP/USD is holding near 1.3315 on Tuesday. The pound posted a modest gain the previous day but remains close to three-month lows amid ongoing uncertainty over the impact of the Middle East conflict on the global economy and inflation. Investors continue to favour the US dollar as a key safe-haven asset.

Since the onset of the conflict involving Iran, the dollar has been the primary beneficiary of safe-haven demand, outperforming gold, government bonds, and currencies such as the Swiss franc. Meanwhile, the pound has shown relative resilience compared with several other currencies: over the past three weeks, it has declined by approximately 1.7%, while the yen and euro have lost around 2.0% and 3.0%, respectively. This relative strength is partly due to the UK’s lower dependence on energy imports and its higher interest rate environment.

The key event of the week is the Bank of England’s meeting on Thursday, where the rate is expected to remain unchanged at 3.75%. Markets are currently pricing in just one rate cut before year-end, marking a notable shift from the two cuts anticipated prior to the conflict’s escalation.

Attention will also turn to UK labour market data, which points to a gradual cooling in employment and a slowdown in wage growth. Against this backdrop, with persistent inflationary pressure and rising energy prices, the pound may face further headwinds if macroeconomic conditions continue to deteriorate.

Technical analysis

On the H4 GBP/USD chart, the market is forming a broad consolidation range around 1.3283, currently extending to 1.3333. A decline to 1.3260 is expected in the near term, after which a new consolidation range is likely to form. An upside breakout would pave the way for a continuation wave towards 1.3360, while a downside breakout would suggest further movement towards 1.3133. Technically, this scenario is confirmed by the MACD indicator, whose signal line is below the zero level and pointing sharply upwards.

On the H1 chart, the market has formed a compact consolidation range around 1.3315. A downside breakout has initiated a wave structure extending to 1.3260. Should this level be breached, further downside towards 1.3125 is likely. Conversely, an upside breakout from the range could trigger a growth wave towards 1.3350. Technically, this scenario is confirmed by the Stochastic oscillator, with its signal line above the 80 level and pointing sharply downwards.

Conclusion

GBP/USD remains in a holding pattern ahead of Thursday’s Bank of England decision, with the pound showing relative resilience compared with other major currencies despite lingering near three-month lows. The dollar continues to dominate as the preferred safe-haven asset amid ongoing Middle East tensions, while shifting rate expectations – from two cuts to just one – reflect the complex inflation dynamics facing policymakers. With UK labour data showing signs of cooling and energy prices remaining elevated, the BoE’s tone on Thursday will be crucial in determining whether sterling can break out of its current consolidation range or extend its recent losses.