GBP/USD Analysis: BoE policy shift supports it.

Amid recent signals from the Bank of England that it is too early to consider cutting interest rates.  Moreover, the continued pressure on the US dollar after the decline in US inflation figures below expectations, which negatively affected the future of the tightening of the policy of the US Federal Reserve. Therefore, strong factors and incentives for the pound sterling against the US dollar (GBP/USD) to rebound upward with strong gains that reached the resistance level of 1.2732 in the morning trading today, Wednesday. Clearly, this current level is the highest for the currency pair in three months.

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Recently, the gains in the pound sterling's price against the rest of the other major currencies, especially the dollar and the euro, extended after the Bank of England governor intensified his campaign against expectations of interest rate cuts, warning that interest rates will not be cut “in the foreseeable future”. Accordingly, the pound sterling began trading for the week on a firm basis and could continue its gains in the coming weeks. Thus, if the market continues to buy the message of Bank of England Governor Bailey and reduce bets on the size of the cuts in the next 12 months.

GBP/USD forecast in the coming days:

In this regard, Robert Howard, a market analyst at Reuters, says that the Bank of England’s suspension of interest rates for a long period “could make the pound sterling proud in 2024.” In an interview in northeast England, Bank of England Governor Bailey said interest rates would not be cut “for the foreseeable future” because reducing inflation from 4% to 2% would be much more difficult than reducing it from 6% to 4%. Accordingly, the Reuters analyst explains that how long the Bank of England will keep interest rates unchanged is a key question for the pound sterling in 2024, “The longer the holding period, the better for the pound.”

Furthermore, he added, “We have to reduce inflation to 2%, and that is why I recently backed away from the assumptions that we are talking about lowering interest rates or that we will lower interest rates in anything like the foreseeable future because it is too early to do that.”

At the start of last week, the market was pricing in up to 80 basis points of UK interest rate cuts for 2024, with the first cut coming in May. But by the end of the week, those bets were down after surprisingly strong PMI data and Bailey's message to the House of Parliament that it was too early to expect interest rate cuts.

Concurrently, financial markets now see a two-in-three chance of the Bank of England keeping interest rates at 5.25% until June 2024, after a hawkish shift in expectations following the UK services PMI surprise in November. Overall, the recent shift in expectations regarding the possibility of interest rate cuts has boosted UK bond yields compared to elsewhere and helped raise the pound sterling exchange rate against the rest of the major currencies. Commenting on this, Han Joo Ho, chief economist at Lloyds Bank, says that British government bond yields rose sharply last week, in contrast to the more moderate changes in their American and European counterparts.

Finally, the price of the pound sterling benefited from the clear improvement in the data with the rise in the economic surprise index in the United Kingdom. Shortly, this is providing the type of positive surprises that could strengthen the currency.

GBPUSD Expectations and Analysis Today:

According to the performance on the daily chart below, the general trend for the GBP/USD currency pair is still bullish. Therefore, breaking the current 1.2730 resistance will move the technical indicators towards strong levels of saturation with purchase. Moreover, we must consider that the weakness of the results of the American economic data this week is not excluded with it. Recently, the currency pair moved towards the psychological resistance level of 1.3000. Vice versa, if the results of the US economic data are better than all expectations, the currency pair may be exposed to profit-taking sales. Controversially, breaking the support 1.2540 is the beginning of breaking the current general upward trend.

GBP/USD (Daily Chart)

Mahmoud Abdallah
Mahmoud has been working fulltime in the Foreign Exchange markets for 12 years. Offers his analysis, articles and recommendations at the most renewed Arabic websites specialized in the global financial markets, and his experience gained a lot of interest among Arab traders. Works on providing technical analysis, market news, free signals and more with follow up for at least 12 hours a day, and aims to simplify forex trading and the concept of trading for his audience.