The Governor of the Bank of England has stated that inflation is expected to decline sharply and approach the 2 percent target by the end of this year.

The GBP/USD pair experienced a sharp decline in Thursday's (May 18) trading session following yesterday's dovish statement from the Governor of the Bank of England (BoE). The pound sterling was observed to have fallen by around 0.6%, reaching its lowest level since April 26 at 1.2397 against the US dollar.

gbpusdGBP/USD Daily chart via TradingView

Governor of the Bank of England, Andrew Bailey, stated at the Annual British Chamber of Commerce Conference that the impact of the announced interest rate hikes so far has not been fully transmitted throughout the economy. However, he mentioned that inflation is expected to decline sharply and approach the 2 percent target by the end of this year.

"The situation appears brighter than it did a few months ago," Bailey said. "In our latest Monetary Policy Report (MPR), published last week, we now forecast moderate but positive economic growth and a much smaller increase in unemployment." He added, "However, we also have strong reasons to expect a sharp decline in inflation in the coming months, starting from the April data to be released on May 24."

Market participants interpret Bailey's statement as a signal that the rate hike cycle has ended and the Bank of England (BoE) will not raise interest rates in the coming months. In the short term, GBP/USD is pressured by such speculation and the appreciation of the US dollar, although its prospects are better in the longer term.

Analysts from ABN AMRO predict that the BoE will not raise rates further but will remain more hawkish compared to the Federal Reserve. Therefore, they forecast GBP/USD to reach 1.24 by the end of September, another 1.24 by the end of this year, followed by an increase to 1.25 by the end of the first quarter of 2024, and 1.26 by the end of the second quarter of 2024.

"We are the least dovish on the BoE compared to the ECB and the Fed," said Georgette Boele, Senior FX Strategy Expert at ABN AMRO. "Compared to the market and other analysts, we are slightly less hawkish on the BoE this year and less dovish next year. As a result, we have updated our forecasts to reflect this divergence. We anticipate a higher sterling exchange rate against the dollar and the euro next year."