This week, the GBP could experience significant fluctuations as key events unfold. On Wednesday, UK headline inflation is expected to reveal one of the lowest readings in over a year, while the core reading is anticipated to remain steady at 6.8% y/y. The recent GBP strength has been fuelled by rising yields, but this trend may reverse during the Bank of England meeting on Thursday.

The current projection from interest rate markets suggests the potential for five more 25 bps rate hikes from the Bank of England, resulting in a terminal rate of 5.75%. However, there are concerns that this pricing may have escalated too rapidly. The Bank of England could provide a more cautious outlook on the future path of rates. If inflation surprises on the downside and the Bank of England adopts a more restrained stance, there could be significant selling pressure on the GBP on Wednesday and Thursday.

The Seasonax risk event feature reveals that in the last 15 years when the BoE hiked interest rates, the GBPUSD has fallen over 80% of the time with an average fall of -1.01%. If the BoE fails to deliver on the extremely hawkish expectations then watch for GBP selling over the decision.

Major Trade Risks: The main risk would be if the BoE increases hawkish expectations.

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