A quarter or a half - how much will the Bank of England raise the interest rate?

European markets went through another tough session, weighed down by concerns about weaker-than-expected economic activity, which in turn raises concerns about earnings growth in the second half of the year. Let's add to that US credit rating downgrade by Fitch and we have a catalyst to continue taking profits after recent record highs DAX index.

US markets have also gone into a correction phase, with Nasdaq xnumx recording its worst session since February, while the US dollar acted as a shelter and bond yields rose. Fitch's rating downgrade tells us nothing about US debt management that we don't already know, but investors seem to want to test the extent of the downside in the market.

Earlier this week we saw weak manufacturing PMI data which showed that the European economy is firmly in recession with declines in activity among manufacturers in the foreground. This raises questions as to whether the service sector will eventually succumb to a similar weakness. There was some evidence of this in recent readings, but overall activity in the services sector has been pretty solid.

Bank of England decision. 25 or 50 bps?

Turning to the event of the day, however, it is worth recalling that the unexpected larger than expected slowdown in inflation in June to 7,9% could be argued that the pressure on Bank of Englandto raise interest rates by another 50 bp, weakened somewhat, especially since Fed i EBC raised rates by 25 bps last week.

After core inflation slowed down higher than expected to 6,9%, expectations for future interest rates have weakened significantly in recent weeks. Market expectations regarding the final rate fell from 6,5% to below 6%.

It is also likely that inflation for July will slow down even more as the effects of the cap on energy prices are adjusted downwards, which may suggest that we may be near the end of the current rate hike cycle.

The issue for the Bank of England is wage growth that has outperformed core inflation and could lead the MPC to opt for a more hawkish monetary policy and raise rates by 50 bp, with the intention of suggesting that this could signal a pause in the coming weeks as the central bank considers how quickly inflation will fall during the third quarter.

Such an aggressive move would be a mistake given that many of the effects of previous rate hikes have not yet fully filtered in suggesting the Bank of England should take a break in the current situation seems unlikely given that 25bp is already valued.

In short, we can expect a hawkish 25bp hike as the bare minimum, and we could also see a split in the vote, with some MPC members pushing for 50bps.

We can also get an insight into how new MPC member Megan Greene sees the current situation when it comes to casting her vote. One thing's for sure, she's not likely to be mellow like the Tenreyro she replaced in MPC.

Key places for GBP/USD

From the point of view of the chart, key places can fall at the following levels. The potential support zone may be being tested right now as it extends to 1,2685. Breaking it could open the way to another potential zone located at 1,2500 and lower to 1,2400. In turn, resistance may be in the region of 1,2920 to 1,2990.

More data from the US labor market and impact on the USD

We will also get further insight into the US labor market after another solid one ADP report on employment, which showed the addition of another 324 jobs. jobs in July. Weekly claims for unemployment benefits are expected to be 225 and we will also get some insight into the service sector with the ISM Services Index for July, which is expected to be at 53. Of particular interest will be the employment component which was at 53,1 in June, after jump from 49,2 in May.

Key spots for EUR/USD

Between the end of May and mid-July EUR / USD exchange rate rose to form a three-wave structure. The current decline is similar to the one we saw from early May to June. Hence, one can note the equality of these downward movements. It is in the region of 1,0830. On the other hand, short-term resistance may be in the area of ​​1,1030.