- Sterling exposed to downside pressure as Bank of England risks becoming first major central bank to signal it is eyeing interest rate cuts this week.
- Meanwhile, the main risk to sterling is that the Bank of England becomes the first major central bank to signal it is now considering cuts interest rates.
- Since the start of the week's trading, the price of the GBP/USD currency pair against the US dollar has been on a limited path, with bears prevailing if it is stable around and below the support level of 1.2150, which increases expectations for the possibility of moving towards the psychological support level of 1.2000.
Analysts Expect Interest Rateto Remain Unchanged
Tomorrow, Thursday, the Bank of England will announce its latest interest rate decision and update its policy guidance. Expectedly, it is likely that rates will remain unchanged, and a clear message will be sent that rates will stay at these high levels for an extended period. Meanwhile, the “staying high for longer” theme is one that has been echoed by all major central banks, which are about to reach the end of their tightening cycles. Ultimately, this communication is aimed at convincing markets to avoid pricing in future interest rate cuts.
Therefore, doing so would lead to a decline in longer-term bond yields, easing the cost of money, and ultimately working against efforts to keep conditions tight enough to reduce inflation. However, The Bank of England has been keen to emphasize that this is its preferred path, with chief economist Huw Pill using a tabletop analogy in a recent speech, but a vote at the Monetary Policy Committee could ultimately undermine this message.
Recently, there are suggestions that Swati Dhingra may vote in favor of lowering interest rates. whence, “If growth falls much more than expected from here, the cut may happen sooner,” Dhingra said in an interview with the BBC on December 12.
Barclays economists expect Dhingra to vote in favor of the cut tomorrow, Thursday, saying in a research note: “We expect the MPC to keep interest rates at 5.25% at the November 2 meeting, with a base case of a 1-6-2 split vote, which accurately reflecting the finely balanced nature of the decision and the reasonable arguments on both sides “(Dhingra will vote for a cut and Mann and Haskell will vote for a rate hike).” If Dhingra votes in favor of a cut, the MPC will signal that interest rate cuts are being actively discussed, making the BoE the first to publicly announce that policy easing is now on the horizon. Therefore, this single vote and the necessary acknowledgment in the accompanying minutes risk undermining any unity around the “higher for longer” message the bank is trying to convey.
Shortly, financial markets are likely to advance expectations of interest rate cuts in 2024, which will put pressure on British bond yields compared to euro zone and US bond yields. Therefore, the mechanical transfer of these expectations to the Forex markets would imply a weakening of the British pound.
GBP/USD Outlook
Our technical view has not changed as long as there has been no significant movement in the performance of the GBP/USD currency pair, the general trend is still bearish. As we mentioned before, moving around and below the support level of 1.2150 will continue to support the bears' control of the trend and increase the chances of moving towards the psychological support level of 1.2000 as well. Therefore, this movement is enough to push all technical indicators towards strong selling saturation levels. On the other hand, and in the same period, there will be no control for the bulls over the trend without moving towards the resistance levels of 1.2330 and 1.2400, respectively.
The GBP/USD will be affected today by the announcement of the reading of the British manufacturing purchasing managers' index, and from the United States and the announcement of the change in non-agricultural American jobs from ADP. Also, the reading of the ISM manufacturing purchasing managers' index, and available job opportunities, ending with the most important decisions of the US Central Bank policy.
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