Pound's fate hinges on size of BOE's august rate hike

If the probability of a 50 basis point rate hike by the Bank of England (BoE) next month continues to diminish, sterling may face further weakness against the euro and U.S. dollar.

Currently, markets assign a 38% chance of a half-point hike from the BoE on August 3, following a shift in expectations due to lower-than-expected UK inflation data for June.

The upcoming release of UK data, including the Office for National Statistics’ June retail sales figures on Friday and flash PMIs on Monday (July 24), could influence BoE expectations. Projections suggest a 0.2% month-on-month increase and a 1.5% year-on-year decline in UK retail sales.

Additionally, the recommendation from the Times shadow Monetary Policy Committee (MPC) on August 2 could carry weight, especially as six members previously advocated for the aggressive 50 basis point increase to 5% implemented by the BoE in June.

As a result of the below-forecast UK inflation data in June, EUR/GBP jumped to its highest level since May 29, reaching 0.8678, while GBP/USD dropped to a one-week low of 1.2924.