The Bank of England said Thursday it would continue to monitor inflation, which is expected to temporarily exceed 3 percent in the U.K. but left its monetary policy unchanged for now.

According to the British central bank, the acceleration in inflation, which is due in particular to a sharp rise in energy prices from their depressed levels in 2020, should remain temporary. Consumer price inflation in the U.K. rose to 2.1% year-on-year in May, exceeding the BOE’s 2% target and leading investors to question its intentions for asset purchases and rates.

Inflation is expected to strengthen further, to above 3%, before falling back, the BOE warned. It is possible that inflationary pressures will prove to be a bit more pronounced than expected, and even though British inflation was already at 2.1% year-on-year in May, no member of the monetary committee voted to raise interest rates, so the BOE kept its key rate at 0.1%. The British central bank’s asset purchase program remains at £895 billion, including £875 billion of government bond purchases.

Despite a bullish momentum that has been in place for several months, the GBPUSD has entered a consolidation phase. Graphically, it is clear that the pair is moving in a range between $1.4250 and $1.3680. In the medium term, traders should pay attention to the break of one of the two limits which should kick off the next directional movement.

For now, prices are trying to break through support at $1.3870, so we believe the market should make a full price rotation to the lower bound at $1.3680. A sell-off has set in at the beginning of June, and until the British pound manages to regain its 20-period moving average, the momentum remains bearish. Traders could look into shorting the pair at current price levels for a target around 1.3815.

On the other hand, the support at $1.3680 is a major level for buyers to start a bullish recovery. In addition, the 200-period moving average is providing support to reinforce this key pivot. This price area will therefore be conducive to a technical rebound.

Support & Resistance Levels:

R3       1.40338
R2       1.39664
R1       1.38990
S1        1.38156
S2        1.37404
S3        1.36807

Analyzed by: Mr. Thibault Moirez, Independent Analyst