GBP underwent a notable sell-off against the EUR towards the close of last week, setting the stage for another critical week ahead. This week, it will confront inflation figures that precede a potentially disruptive Bank of England interest rate decision. 

GBP is currently sitting at a three-month low in anticipation of the upcoming monetary policy decision by the Bank of England scheduled for Thursday.  Interest rate markets are currently indicating an approximately 80% probability of a 25-basis point increase, which would raise the cash rate to 5.50% – the highest level seen since before the 2008 financial crisis.  Should the bank choose to deviate from the expected 25 basis point increase, it could trigger increased GBP volatility.

It is highly probable that the Bank will issue guidance designed to signal the conclusion of the interest rate hiking cycle. This move will naturally prompt inquiries regarding the likelihood of another interest rate increase in November.  This anticipated development has been factored into market expectations and has manifested in the gradual depreciation of GBP over the past month.  Consequently, it should not catch currency markets by surprise.  However, if the inflation data released on Wednesday and the Bank of England's decision on Thursday turn out to be unfavourable for GBP, then we might see GBP/EUR testing the lows from July and August, which are around 1.1540.

Also, this week we have FOMC policy meeting on Wednesday.  According to a Reuters poll of economists, the Federal Reserve is expected to keep its benchmark overnight interest rate unchanged.  It is likely that any rate cut will be deferred until the period between April and June of 2024 or even later.  Fed Chair Jerome Powell emphasized the "higher-for-longer" approach to interest rates during his speech at the annual Jackson Hole central banking symposium in August. He also indicated that another rate hike may still be necessary to bring inflation down to the target of 2%.