- Sterling pairs, without exception, are cautiously watching the reaction to today's Bank of England announcement. Prior to the event, the price of the GBP/USD currency pair was subjected to downward pressure, as a result of which it moved towards the support level at 1.2680, its lowest in nearly a month, and settled around 1.2720 at the time of writing.
- Investors reduced exposure to the British pound ahead of the Bank of England's decision on Thursday as anything other than a 50 basis point interest rate hike could lead to a decline according to some forex specialists.
- Money market pricing shows that investors expect a 34 basis point rally from the bank, effectively splitting opinion on a 25 basis point move or a 50 basis point move from the bank.
A 50bps rally in the exchange rate could help restore GBP/USD above the 1.30 psychological resistance and support for GBP in general, as this relative forward loading comes at a time when other central banks appear to have completed their final hikes.
According to analysts, the biggest downside risk for the British pound includes the British central bank raising by 50 basis points and saying that this is the last rise. Their scenario analysis sees a 10% chance of such an outcome and says it could lead to a roughly 0.80% drop in the value of the pound. Under such a scenario, a 50 basis point hike would be accompanied by language that the move was intended to "rush" to the final level, and with forward guidance raise the bar for future hikes.
For their part, the Federal Reserve and the European Central Bank said last week that they are not committed to raising interest rates again in September because they want to see the nature of the next set of economic data. These moves could potentially open the door for the Bank of England to seek accommodation by also looking to signal the end of its tightening cycle.
This would be welcomed by businesses and mortgage holders, but for GBP it could lead to weakness.
GBP/USD Technical Outlook
Besides the above-mentioned narration, the GBP/USD will also be affected by the release of the US job numbers tomorrow. So far, the economic data is still in favor of the strength of the US dollar. Accordingly, the GBP/USD pair may remain in a downward trend, especially if the Bank of England confirms that it will stop the path of tightening its policy, as the rest of the global central banks have done recently, and therefore the next most important support levels will be 1.2670 and 1.2560, respectively, which are areas that will move the technical indicators towards saturation levels.
On the other hand, according to the performance on the daily chart below, a break of the current bearish trend will not occur without stability above the psychological resistance at 1.3000. The US dollar is on a date today with the announcement of the number of weekly jobless claims, the non-agricultural productivity index, and the reading of the ISM services index.
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