Prior to the Bank of England’s announcement, the price of the British pound against the US dollar “GBP/USD” stabilized around the level of 1.2180. As the pair is recovering from yesterday’s losses, which affected the support level of 1.2095, as the US dollar remains the strongest with investors’ desire to buy it as a safe haven, in addition to the US Central Bank’s lead over the rest of the central banks in the pace of raising interest rates. And before today's event, the pound could walk away unscathed from the Bank of England's interest rate decision in November if no members of the Monetary Policy Committee (MPC) vote in favor of a rate cut and inflation and growth expectations do not change radically. Obviously, this is because keeping interest rates unchanged is completely expected and will have little impact on financial markets. Instead, for forward-looking financial markets, it is the guidance in the statement and forecasts in the monetary policy report that will matter.
A “higher for longer” message will be sent in the statement and minutes, but the words will ring hollow unless given credibility by the composition of the MPC vote firstly, and the economic outlook secondly.
Regarding the vote, markets expect a strong majority to vote in favor of keeping interest rates unchanged, but the initial downside risk for sterling could see Swati Dhingra - the most pessimistic on the MPC - break and vote for a rate cut. Meanwhile, this is something Barclays economists expect, and would serve as an initial signal to markets that the Monetary Policy Committee is now discussing interest rate cuts. If Dhingra votes in favor of the reduction, the minutes must indicate her decision and any related discussions.
However, this may provide a signal to financial markets that interest rate cuts are closer than previously thought. The typical response function in the Forex market suggests that the pound might weaken because of such an outcome, but this alone is unlikely to be enough to trigger a significant sell-off. Also, Economic forecasts will be important as they are used by the Monetary Policy Committee to guide market interest rate expectations, which in turn have realistic impacts on both the cost of borrowing and the exchange rate.
For example, by releasing forecasts that show that British inflation is expected to fall below the 2.0% target by 2025, markets will be able to assume that the bank will be able to cut interest rates at some point in 2024. Consequently, how will the shift in these forecasts lead to forecasting adroitness. The rule of thumb is that raising growth and inflation expectations can be read as a concrete signal that the bank will stick to its word about the need to keep interest rates higher for an extended period.
Finally, lowering growth and inflation expectations makes such guidance ring hollow, which could allow the market to advance expectations of interest rate cuts, which would likely lead to a decline in sterling. For GBP/USD, the October low at 1.2037 will be the key support level.
GBP/USD Outlook & Predictions
Based on the above, the path of the British pound against the US dollar (GBP/USD) for the rest of this week's trading will be determined by the announcement of the Bank of England and the members' vote. Therefore, we should also not forget to mention the reaction of the remaining US economic data, led by the announcement of US employment numbers. As we mentioned in the latest technical analyses, the stability of the GBP/USD around the support level of 1.2150 will support the move towards the next psychological support level of 1.2000. On the other hand, according to the performance on the daily chart, moving towards the resistance levels of 1.2330 and 1.2400 will be important to break the current downward trend.
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