Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2400.
- Add a stop-loss at 1.2560.
- Timeline: 1-2 days.
Bullish view
- Buy the GBP/USD pair and set a take-profit at 1.2560.
- Add a stop-loss at 1.2400.
The GBP/USD pair will be in the spotlight on Thursday as the Bank of England (BoE) provides hints on when it will start slashing interest rates. After spiking to 1.2633 after the weak US jobs numbers on Friday, the pair has pulled back as traders bet that the BoE will start to slash rates ahead of the Fed.
Bank of England decision ahead
Most investors and economists are convinced that the BoE will start cutting rates in summer as the UK economy slows and inflation moves to 2.0%. Recent economic numbers revealed that the country’s inflation dropped from 3.4% in February to 3.2% in March. It has dropped from a high of 11.2% in 2022.
Economists believe that the falling energy prices will bring the country’s inflation to about 2%. At the same time, the economy is not doing well, with manufacturing PMI remaining below 50 in April. Another report showed that retail sales dropped by 4.4% in April after rising by 3.2% in March.
The swap market shows that the BoE will start cutting rates in its June meeting to stimulate the economy.
On the other hand, the Fed will likely start its cutting cycle in the fourth quarter. The Fed is at a difficult place because the US has moved into a stagflation, which is characterised by slow economic growth and high inflation.
Recent data showed that the US economy expanded by 1.6% in Q1 after growing by 3.4% in the previous month. Consumer confidence slumped in April while the manufacturing and services PMIs dropped below 50.
At the same time, the bank is dealing with inflation that has stopped falling. The headline Consumer Price Index (CPI) sits at 3.5% while the PCE moved to 2.6%. As such, the bank wants to avoid premature rate cuts that could stimulate inflation.
Meanwhile, hedge funds and other speculators are still bearish the British pound as evidenced by the recent CoT reports by the CFTC. In a note this week, State Street, a leading custodian with over $44 trillion in assets, said that sterling holdings among asset managers had slumped to a yearly low.
GBP/USD technical analysis
The GBP/USD pair technical analysis rose to 1.2633 after the weak US jobs numbers last week. It has now erased most of those gains and is hovering at its lowest point in a week. On the 4H chart, it has moved between the 23.6% and 38.2% Fibonacci Retracement level.
It is also between the first and second support levels of the Andrew’s pitchfork tool. Most notably, it has also crossed the 50-period moving average while the Chande Momentum Oscillator (CMO) has moved below the neutral point.
Therefore, the pair will likely have some volatility after the BoE decision. In this case, the key support and resistance levels to watch will be 1.2400 and 1.2560.
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