Energy price shocks have not yet fully fed into inflation, but the Bank of England is widely expected to hold its benchmark interest rate at 3.75% during this week’s monetary policy meeting. However, with Middle East tensions driving oil prices back toward $100 per barrel and European gas prices climbing to levels not seen since the start of the conflict, the Monetary Policy Committee may adopt a more cautious or even hawkish communication style. This approach aims to prevent markets from underestimating future inflation risks.
Since the Bank of England’s June meeting, global energy markets have undergone a significant shift. Renewed instability in the Middle East is once again affecting supply expectations, pushing international oil prices close to $100 per barrel, while European natural gas prices have reached their highest point since the early stages of the conflict. If key shipping routes in the Gulf region remain disrupted, energy prices could rise further, increasing global inflationary pressures through the energy cost channel.
Where to start
However, current UK economic data does not yet indicate that the energy shock has translated into more persistent price pressures. The UK economy has performed better than the Bank of England’s earlier forecasts, with gross domestic product growing by 0.7% in the three months to May. This combination of economic resilience and cooling inflation gives the central bank room to maintain stable policy.
On the inflation front, the UK Consumer Price Index (CPI) has come in below market expectations for three consecutive months, dropping to 2.6% in June. Meanwhile, wage growth, a key domestic source of price pressure, is slowing, and food price increases have also eased. Markets believe these factors will reduce the immediate need for the Bank of England to tighten policy.
Why just one rate decision?
Economists expect the Monetary Policy Committee to hold the benchmark rate at 3.75% during its Thursday meeting, but the policy statement may emphasize the possibility of future rate hikes. If energy prices continue to climb due to supply risks, or if businesses and consumers begin translating higher energy costs into broader price increases, the Bank of England may need to reassess its policy path.
The core challenge facing the Bank of England is balancing the need to control inflation expectations against the risk of overly restricting the economy. From a market perspective, energy price trends will become a key factor influencing the British pound and UK interest rate expectations. If oil prices remain elevated, investors may raise their expectations for the Bank of England to maintain high rates for an extended period, or even to tighten again, which would support the pound. Conversely, if energy market risks ease and UK inflation continues to fall, markets could reprice expectations for future rate cuts.
Additionally, UK economic growth performance will shape policy judgments. While the economy has shown some resilience, consumer spending, business investment, and external demand still face pressure. The Bank of England must determine whether current growth is strong enough to withstand an energy shock, or whether more accommodative policies are needed to support economic activity.
Overall, this meeting is more likely to be one where the Bank of England “keeps rates unchanged but sharpens its vigilance.” The central bank may not immediately adjust rates, but it could send a clear message to markets that rising energy prices remain a significant source of future inflation risk, and that policymakers will not easily let their guard down.
From the perspective of the British pound, the market is currently focused on changes in Bank of England policy expectations and the direction of the US dollar. If the central bank sends a hawkish signal, the pound could see short-term support. Conversely, if its statement emphasizes economic growth risks, the pound may face downward pressure.
The daily chart for the British pound against the US dollar shows that the pair has been oscillating and rebounding recently, testing a prior resistance area. The key upside level to watch is around 1.3400. If this area is breached, the pair could move toward the 1.3450–1.3500 zone. On the downside, support is seen near 1.3300 and then 1.3250. The overall trend still depends on US dollar movements and the signals from the Bank of England.
On the 4-hour timeframe, short-term momentum in GBP/USD has recovered somewhat, with moving average structures gradually improving and buying sentiment increasing. However, investors may remain cautious ahead of the Bank of England meeting, leading to range-bound price action. If the pair holds above 1.3350, it could test higher resistance. A break below 1.3300 would likely lead to a retest of the 1.3250 support area.
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