In anticipation of the BoE meeting and US weekly jobless claims, the pound is trading sideways

The FTSE is set for a tepid start on Thursday as markets are jittery ahead of the Bank of England policy decision.

A 50 basis point increase in interest rates is widely expected by the central bank, which would be the largest increase since 1995. In the wake of this interest rate hike, the benchmark rate will rise to 1.75%, the highest level since late 2008 at the beginning of the global financial crisis.

After Russia invaded Ukraine and global economic strains after the pandemic, Britain's main inflation rate soared to 9.4% - and could go as high as 15% by early 2023, according to the Resolution Foundation think-tank.

Despite raising borrowing costs five times since December, the Bank of England said before that it would act forcefully if inflation pressures persist. However, fighting inflation will be costly for the economy, especially for households. Several factors are pointing to a slowdown in the world economy. We've seen a drop in core inflation in the latest figures. The bank's revised projections on Thursday are expected to show that inflation will fall sharply over the next two or three years. In its last forecast released in May, the BoE stated that it did not expect growth in the British economy until at least 2025 at the earliest.

Stocks in the rest of Europe are expected to open higher on Thursday, building on gains from the previous session. A positive start for European stocks follows Wednesday's gains from strong economic data in the United States, which eased investor fears of a looming recession. A surprise rebound in the ISM non-manufacturing purchasing managers index in July was also responsible for the rise in US stocks. 

Investors are returning to beaten-down tech stocks after the July services PMI unexpectedly rebounded, helping to ease fears that the United States has already entered a recession. Following three consecutive months of declines, the index released Wednesday ended its downward trend. Additionally, durable goods orders and manufacturing data were better than expected in June.

GBP/USD outlook

The dollar held onto recent gains on Thursday, helped by several US Federal Reserve officials pushing back against suggestions they will slow the pace of interest rate hikes, while the pound was flat ahead of the meeting. GBP/USD started the month in a downtrend breaking below the 1.22400 support. The pair is trading in a range on the one-hour chart, topping at 1.21668 and heading to 1.21360. The short-term trend can be reversed if this support holds. Should the pound gain ground on a more-than-expected hawkish stance from governor Bailey, GBP buyers would attempt to push the price above 1.21668, reclaiming Wednesday's top at 1.22. Otherwise, clearing the range floor could send the pair to touch the 1.2100 support level.

Events of today

Investors will also closely watch the UK construction PMI for July to see if business activity in the industry continues to decline. The index is expected to come in at 52, falling from 52.6 in June, the lowest level since April 2021.

Following the BoE's rate decision, Governor Bailey's speech will be an important event for the pound and its crosses, as it will provide insight into the central bank's future monetary policy.

Elsewhere in the US, the latest weekly jobless claims will shed some light on the latest developments in the labour market ahead of Friday's non-farm payrolls. The unemployment claims have been soaring since early May, reflecting a vulnerable labour market.