Don't trust words, trust actions. Bank of England Governor Andrew Bailey hints at the erroneousness of market judgments regarding the further tightening of monetary policy, while Chief economist Huw Pill speaks of the need for prudence. The latest statistics on wages, housing prices, and inflation turned out to be better than expected. And if the BoE continues to adhere to data-dependent policies, the repo rate will rise to 4.75% and, possibly, to 5%. This situation inspires "bulls" in GBP/USD for new attacks.

The pair reached an 11-month high due to the possibility that the Bank of England may go further than the Fed and the ECB. After the May FOMC meeting, investors believe that the federal funds rate has reached its peak and will fall by at least 50 basis points by the end of the year. The European Central Bank's hike may also soon come to an end. The market has lowered its expectations for the deposit rate peak from 3.9% to 3.6%. It is quite possible that the next tightening of the ECB's monetary policy will be the last. The cause is the slowing inflation in the U.S. and the eurozone.

UK inflation dynamics and repo rate

In Britain, everything looks different. Consumer prices continue to be above the 10% mark. This despite the BoE's preparedness to raise the repo rate for the 12th consecutive time. The indicator will grow by 440 basis points, which is the most aggressive tightening of monetary policy since 1989. All Reuters experts expect borrowing cost will increase by 25 basis points to 4.5% in May. Just a few weeks ago, specialists could not reach a consensus.

The assumed repo rate ceiling is between 4.75% and 5%, which implies another 1–2 acts of monetary restriction. Expectations of such steps by the Bank of England, against the backdrop of the anticipated Fed pause, have led to the yield of 10-year British bonds exceeding their U.S. counterparts for the first time in a long time. This situation contributes to the capital flow from the United States to the UK and strengthens the pound against the U.S. dollar.

Unlike the Federal Reserve, which investors believe will reduce borrowing costs in 2023, the BoE will maintain them at least until mid-2024. Divergences in monetary policy play into the hands of "bulls" in GBP/USD.

Market expectation dynamics for Fed and Bank of England rates

In my opinion, the markets underestimate the American economy. April statistics on employment, unemployment, and average wages show that it is far from cooling down. Insisting on a "dovish" reversal in this context is foolish. The chances of a 25 or more basis point cut in the federal funds rate in September fell from 90% to 75%. Their further reduction will contribute to the return of investors' interest in the U.S. dollar.

Technically, the upward trend in GBP/USD looks stable. However, the pair's inability to hold above support at 1.2635 or a rebound from the 1.2675 pivot point will increase the risks of a pullback and become a reason for fixing profits on previously formed long positions and reversal.