On Thursday, August 7, the Bank of England will hold its next meeting. According to the forecasts of most analysts, the central bank will cut the interest rate by 25 basis points, bringing it down to 4.0%.

This scenario is considered the baseline and, therefore, already priced in. As such, the market is likely to ignore the fact of a 25-basis-point cut. But that doesn't mean the August meeting will be a formality. The main intrigue lies in determining the pace of further monetary policy easing. Here, things are far less certain. On the one hand, the central bank may voice dovish signals, pointing to a cooling labor market and a slowdown in UK economic growth. On the other hand, the central bank could take a more cautious stance, citing accelerating inflation.

To recap, the UK's headline consumer price index rose to 3.6% year-over-year—the highest rate of growth since January last year. Core CPI, which excludes energy and food prices, also accelerated to 3.7% year-over-year. The retail price index increased to 4.4% year-over-year, defying forecasts of a slowdown to 4.2%.

A key point: inflationary pressure in the UK is persistent rather than temporary. In particular, core inflation in the services sector (rent, insurance, healthcare, education) stood at 4.7%.

Inflation is accelerating against the backdrop of weakening key macroeconomic indicators.

Unemployment in the UK rose to 4.7%, marking a nearly four-year high (the highest since June 2021). Wage growth slowed again—both in nominal and real terms. Specifically, excluding bonuses, wage growth fell to 5.0% from 5.3% the previous month. In real terms (adjusted for CPIH), wage growth amounted to 1.0%.

In other words, we are seeing labor market weakness alongside a decline in wage growth.

As for the overall state of the economy, the picture also appears rather gloomy. In the first quarter, the UK's GDP grew by 0.7% quarter-over-quarter and by 1.3% year-over-year. Services (0.7%) and manufacturing (1.1%) contributed the most. Q2 data will be published next week (August 14), so policymakers will have to rely on monthly indicators, which have been disappointing. For example, in May, the economy contracted by 0.1% month-over-month; in the previous month, it shrank by 0.3% m/m. Other components were also disappointing: industrial production dropped by 0.9% m/m and 0.3% y/y. Manufacturing output fell by -1.0% m/m (compared to a forecast of -0.1%).

In other words, GDP has declined for two consecutive months, signaling an economic slowdown in Q2—especially in the manufacturing and construction sectors. At the same time, the labor market is cooling and inflation is accelerating. This points to a moderate but present risk of stagflation (a "soft" form of stagflation). The puzzle is further complicated by fiscal policy, as the UK's Finance Ministry is expected—according to many analysts—to announce tax hikes in the fall to meet budgetary targets.

So, what should we expect from the BoE, given these challenging fundamentals?

In my view, the results of the August meeting will reflect a split within the Monetary Policy Committee. The dovish wing of the committee (primarily Swati Dhingra and Alan Taylor) may advocate for a more aggressive pace of rate cuts, citing the worsening labor market and economic slowdown.

Meanwhile, members of the hawkish wing (including Chief Economist Huw Pill) will likely focus on rising inflation, which remains above the target and continues to trend upward. The hawks may vote to maintain a wait-and-see stance. According to preliminary forecasts, the vote may split as follows: "0-8-1"—that is, zero votes for a hike, eight for a cut, and one to keep the rate unchanged.

Any other configuration is likely to trigger increased volatility in the GBP/USD pair. For instance, if more than one member votes to maintain the status quo (e.g., "0-7-2" or even "0-6-3"), the pound would receive substantial support. Conversely, if the vote to cut rates is unanimous, the British currency would come under pressure.

In my view, the BoE will not meet the market's overly dovish expectations—in other words, the outcome of the August meeting is likely to favor the pound. The central bank will cut the rate, but the accompanying statement and Andrew Bailey's comments will likely be cautious and vague. Moreover, the updated economic forecasts from the central bank will probably differ little from those released in May.

Such an outcome would provide additional support to GBP/USD, potentially allowing buyers to return to the 1.34 area—breaking through the resistance level at 1.3400 (the middle line of the Bollinger Bands on the D1 timeframe) and testing the next price barrier at 1.3470 (the lower boundary of the Kumo cloud on the same timeframe).