The Bank of Japan raised interest rates, while Fed Chair Jerome Powell suggested the possibility of rate cuts in September. Despite these developments, the British pound remained stable as investors are cautious ahead of the Bank of England's decision. Unlike previous well-anticipated meetings in London, today's decision presents uncertainty as economists and markets are divided on whether the dovish members will succeed in pushing through a rate cut.

The main argument for easing policy is the significantly higher real rate (policy rate minus inflation) in the UK compared to the United States and Eurozone. Although headline inflation has decreased to 2.1%, the benchmark rate remains at 5.25%. On the other hand, hawks within the Monetary Policy Council (MPC) argue that the economy is robust, having grown by 0.7% in Q1. Additionally, services, rent, and wage inflation remain high and persistent, with leading indicators suggesting a slight reacceleration of inflation. Nonetheless, markets seem to expect the Bank of England to initiate a cutting cycle, as indicated by the 2-year yield falling to its lowest level since March 2023, at 3.8%.

The GBP/USD has been flat this week but could see increased volatility today with the BoE decision and tomorrow with the US labor market report. The current intra-week range of $1.2800 to $1.2880 is likely to be surpassed due to these significant risk events.