Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2300.
- Add a stop-loss at 1.2500.
- Timeline: 1-3 days.
Bullish view
- Set a buy-stop at 1.2380 and a take-profit at 1.2450.
- Add a stop-loss at 1.2300.
The British pound continued its strong sell-off on Monday morning as all signs pointed to a Bank of England (BoE) rate cut as soon as in its next meeting. The GBP/USD pair crashed to a low of 1.2370, its lowest point since November last year.
Bank of England rate cuts ahead?
The GBP/USD pair continued its downward trend after Dave Ramsden, the deputy governor of the Bank of England (BoE) hinted that the bank would slash interest rates soon. He noted that inflation will continue falling and that it will near the 2% target in April.
Energy prices have been in a downward trend in the past few months and the trend may continue. The only risk is that the crisis in the Middle East will lead to more inflation pressures in the country. Crude oil, a key contributor to inflation, has jumped to over $90.
Economists have mixed opinions about when the Bank of England will start to cut rates. In a note last week, analysts at Morgan Stanley estimated that the bank would deliver its first cut in May. Most analysts, however, see the bank starting to cut in September because of the strong wage growth.
Meanwhile, the Federal Reserve is expected to be more restrictive because of the ongoing reflation trends in the country. Recent data showed that the headline inflation continued rising in March, with the headline CPI rising to 3.5%.
Therefore, most Fed officials agree that rates should remain at restrictive levels for a while. Besides, there are signs that the American economy is doing well, with retail sales and consumer confidence rising. The IMF expects that it will be the best-performing economy in the G7 this year.
There will be no GBP/USD news on Monday. As such, focus will be on Tuesday’s flash manufacturing and services PMI numbers. The pair will also react to the upcoming US GDP and PCE report.
GBP/USD technical analysis
The GBP/USD pair retreated sharply after signs of a Fed and BoE divergence continued. On the daily chart, the pair plunged below the key support at 1.2515, its lowest swing on February 5th. The pair has dropped below the 50-day moving average.
The Relative Strength Index (RSI) has dropped to the oversold level of 30 while the MACD indicator has crossed the neutral point. Therefore, the pair will likely continue falling as sellers target the crucial support level at 1.2300.
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