GBP/USD forecast: BoE rate decision looms

The Bank of England is set to announce its latest policy decision shortly, which could have an influence on the GBP/USD forecast if they deliver any major surprises. Risk sentiment has remained largely positive, and this has allowed the cable to climb a little higher ahead of the BoE decision, approaching a key technical zone between 1.3100 to 1.3140.

 

BoE to hold or to cut?

 

The BoE faces a clear dilemma: whether to cut rates now or hold steady ahead of the government budget later this month, where the Chancellor is widely expected to unveil tax increases. Recent inflation data has eased the pressure on the BoE to act immediately — headline CPI remained at 3.8% year-over-year in September, below expectations for a rise to 4.0%, while core CPI declined to 3.5%. This softer inflation backdrop prompted traders to scale back hawkish bets, leading to a weaker pound and another series of record highs for the FTSE. Given the timing of the upcoming budget, the BoE is likely to hold rates at 4.00% for now and reassess its stance in December, when a rate cut appears more probable. Should policymakers signal that a cut is on the horizon, it would likely enhance the attractiveness of UK equities, providing additional support for the stock market. But the pound’s reaction could be more limited, with the market remaining focused on that budget on 26 November.

 

 

 

Stronger US data and Fed’s hawkish repricing vs. risk sentiment

 

The US dollar rally came to a halt yesterday and we have seen some further gains in major pairs like the GBP/USD, EUR/USD and AUD/USD today, all thanks to improving risk appetite. The little data we have had from US has generally been decent.

 

Yesterday’s data releases added to the positive tone in markets, but didn’t give the US dollar any further boost, expect against haven currencies like the JPY. The latest ADP private-sector payrolls report exceeded expectations, showing an increase of 42,000 jobs compared to the 32,000 forecast. In addition, the ISM Services PMI surprised to the upside, coming in at 52.4, well above both the 50.7 expected and the 50.0 recorded previously. The report showed strong growth in new orders and business activity, while the employment component contracted at a slower pace than the prior month (48.2 vs. 47.2), suggesting some stabilization in the labour market.

 

Due to the ongoing U.S. government shutdown, no major economic data releases are expected in the near term, though numerous Federal Reserve officials are scheduled to speak today, and their remarks could influence market sentiment and impact the GBP/USD forecast. Looking ahead to Friday, attention will turn to the University of Michigan’s consumer sentiment and inflation expectations surveys. Consensus calls for a slight dip in sentiment to 53.0 from 53.6, but any upside surprise would likely be viewed as supportive for equities, which, paradoxically, may prevent the dollar from making more gains.

 

UK data has been largely positive

 

In contrast to yesterday’s stronger data from the UK, where the services PMI proved to be stronger than initially reported today’s release of the construction PMI failed to impress at 44.1 vs. 46.9 expected, and down from 46.2 in the previous month.  Apart from this, most of the other data releases have been good recently, including the PMI and retail sales, while inflation has unexpectedly remained at 3.8% when a rise to 4.0% was expected. Still high, though.

 

Technical GBP/USD forecast

 

 

Despite a two-day recovery, the GBP/USD forecast still leans moderately bearish due to the fact it has formed a lower low and broken key support at around 1.3100-1.3140 area, as shaded on the chart. It will need to reclaim this zone before we turn tactically positive on the cable again. Further resistance lies around the 200-day average where an old low also comes into focus around 1.3250. In terms of support, 1.3050  and 1.3000 are the next immediate downside levels to watch.

 

 

 

 

-- Written by Fawad Razaqzada, Market Analyst

Follow Fawad on Twitter @Trader_F_R