Earlier, the Bank of England unexpectedly kept interest rates on hold (not to us) and GBP tumbled again, initially below 1.2250.
Bank of England’s The policy statement was somewhat hawkish and the Monetary Policy Committee was divided. That means the next few policy decisions could be close calls, especially if inflation doesn’t fall fast enough.
Therefore, it is not too unreasonable to think that the downside for GBP may be limited going forward. However, this may not be the case for USD/USD, which may remain supported on the downside due to a very hawkish Fed.
Therefore, GBP/USD could weaken further even if other GBP crosses perform strongly.Now that we’ve heard from both sides, traders will once again be looking to the data This week the Fed and Bank of England, along with several other major central banks.
So why doesn’t the Bank of England raise interest rates?
The Bank of England decided to err on the side of caution and keep policy unchanged. It’s pretty alarming that the Bank of England is concerned about the country’s economic performance.
Policymakers believe monetary policy is currently restrictive enough to curb inflation, which remains three times the Bank of England’s 2% target rate. However, the BoE believes consumer prices are likely to fall sharply in the short term, reflecting lower annual energy inflation and further declines in food and core commodity price inflation.
Because monetary policy will be “sufficiently restrained for a long enough time,” the economic costs of additional interest rate hikes will outweigh the benefits of lower inflation.
However, with global oil prices rising and UK wages rising at record levels, there are a number of reasons why price pressures may remain elevated. As a result, the Bank of England has left the door open for further interest rate hikes if necessary.
In any case, it will keep monetary policy restrictive for a long time until it is confident that inflation can return to the 2% target in a “sustainable” manner over the medium term.
Bank of England maintains policy amid split decision
In case you missed it, the Bank of England voted 4 to 5 to keep interest rates on hold at 5.25%, compared to the 8 to 1 vote expected. Governor Bailey and MPC members Broadbent, Dhingra, Peel and Lumsden all voted to keep policy unchanged.
Cunliffe, Greene, Haskel and Mann want another 25 basis points. The only thing the committee unanimously agreed on was a vote to reduce the stock of UK government bond purchases by £100 billion over the next 12 months, to a total of £658 billion.
This is one of the most difficult decisions for Bank of England policymakers. Just a week or so ago, the market was almost completely convinced that the central bank would raise interest rates by 25 basis points, with a 90% chance of this outcome.
But that possibility was slashed after lower-than-expected inflation data on Wednesday. Chances of a rate hike fell to 50/50, dragging the pound lower.
In addition to easing inflationary pressures, we also saw further evidence of a slowdown in the economy, with monthly GDP data falling 0.5% and PMI data in contractionary territory below 50.0.
The repricing of the Bank of England’s interest rate decision means that whatever the Bank decides now, a set of market participants will be proven wrong, so the pound’s reaction will therefore be different than if the interest rate decision were more predictable. more meaningful.
You see, the pound did move wildly, plunging about 65 points in the immediate reaction to the interest rate decision before rebounding slightly from the lows.
What’s next for GBP/USD? Will the dollar rise further?
Now that the Fed and Bank of England interest rate decisions are over, the focus will once again turn to the economic calendar.
- U.S. jobless claims, the Philadelphia Fed and existing home sales will be released on Thursday.
- The Bank of Japan policy decision and global purchasing managers’ indexes will be released on Friday.
If the upcoming data continues to support the view that the US economy is performing better than the UK economy, then pressure on GBP/USD should continue for some time.
That’s because the Fed has sharply lowered its forecast for its 2024 easing cycle, meaning it could cut interest rates by 50 basis points instead of the 100 basis points expected in June.
More importantly, the Federal Reserve has hinted that it may raise interest rates again before the end of 2023. So the Fed is actually suggesting that interest rates will be cut by a net 25 basis points by the end of 2024, which is quite hawkish.
Now, whether that will be the case remains to be seen, as the Fed and other central banks have a habit of grossly underestimating or overestimating things. Of course, the market will make its own decisions, which will depend on incoming data.
For the dollar to end its bullish bias, we now need to see significant weakness in future U.S. activity data. Until then, the USD should maintain its bullish trend.
GBP/USD technical analysis
GBP/USD is now below our main target of 1.2308, the May low, and many trapped long speculators undoubtedly have their stop-loss orders at this level.
Now that this liquidity pool has been tapped, the next question is: will there be acceptance below levels around 1.23? So far, the answer seems to be a resounding “yes.” Let’s see if that changes later as U.S. investors get involved.
If the price is accepted below around 1.23, we should see fresh technical selling pressure in the coming days as more bullish speculators abandon their bets.
In this case, I think GBP/USD is likely to fall back to the 1.20-1.21 range next, with several technical factors converging – the 38.2% Fibonacci retracement of the 2023 open, and the 2023 The psychological importance of opening prices. 1.20 Circle diagram.
However, if there is no acceptance below 1.23 and we see a quick bounce back above that level, then this will increase the likelihood that we see at least a short-term bottom. In this case, the outcome could be a return to the 200-day moving average near 1.2330.
So from a tactical perspective, I will just focus on price action today and see where it ends up heading now that the pound has fallen to my main downside target. This should give us a good idea of what to expect next. A bearish close is what I continue to favor and look forward to.
Originally published on MoneyShow.com
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