- The British pound recovered from its lows after the Governor of the Bank of England walked back expectations that the Bank of England would cut interest rates as early as the third quarter of 2024.
- In the case of the GBP/USD, it rebounded higher, reaching the resistance level of 1.2390, its highest level in five weeks, and stabilizing around 1.2373 at the start of trading this week.
It's Too Early to Say When Interest Rates Will Be Cut
Bank of England Governor Andrew Bailey said in a television interview following the November interest rate decision. "If markets have taken from what we have published today the view that we are leaning towards more cuts, then I'm afraid I'm leaning against that, yes." Recently, the pound has fallen against the euro and out of its highest levels against the dollar following the bank's decision to keep interest rates at 5.25% and signal that more hikes are imminent. Despite the bank's attempts to impose a "higher for longer" message, financial markets raised their bets on the first interest rate cut to be implemented by at least September 2024. Moreover, The provision of expectations for interest rate cuts has boosted the value of British bonds, thereby lowering their yields, which in turn has affected the pound.
On the other hand, the bank may have kept interest rates unchanged, but it is still not comfortable with any sense that this is a signal that rates are coming. Such a belief inadvertently works to loosen financial conditions in the UK (lower bond yields lead to lower cost of money. Therefore, this risk creating new inflationary impulses, which would hinder the bank's efforts to bring inflation back to 2.0% in a timely manner.
Lately, Governor Bailey of the Bank of England confirmed that it is "too early to say" when interest rates will be cut. Although the bank said in a statement that "monetary policy is likely to need to be tight for a long time," market participants were looking for scraps of evidence to contradict this position. Also, the bank's economists' decision to cut growth forecasts was quickly interpreted by traders as evidence that the bank's inflation forecasts may be too rich, meaning that it would be able to cut interest rates as early as the third quarter of 2023.
Consequently, the Bank of England lowered its growth forecast for 2024 to 0% from 0.50%. Overall, traders are now fully priced in for the first interest rate cut to occur in September 2024, followed by another move lower by the end of the year. After these developments, Governor Bailey was adamant that "we still see the risks to inflation trending upwards at the moment and it is important that this message is not lost."
In general, both the US Federal Reserve and the Bank of England left borrowing costs unchanged as they approach the end of their tightening cycles. Meanwhile. the Fed's decision to pause came unanimously, many policy makers in the UK voted for another quarter-point rate hike. Shortly, both central banks left the option of raising interest rates open again, but the weak US jobs report at the end of the week reinforces investors' view that the Fed's campaign may be over.
GBP/USD Outlook
The daily chart shows that the GBP/USD exchange rate has moved sideways in the past few weeks. Recently, a small triangle pattern was formed. It also remains below the 50-day and 100-day weighted moving averages (WMA). Meanwhile, the Relative Strength Index (RSI) and Stochastic are pointing higher. Therefore, the pair's outlook remains bearish, and the initial target is at 1.2030, the lowest point on October 4. In contrast, the alternative scenario is for the GBP/USD pair to bounce and retest the psychological level of 1.2500.
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