GBP/USD braces for BoE rate decision
James Chen, CMT August 3, 2016 12:50 PM
The first BoE policy meeting after Brexit, in mid-July, resulted in the committee opting for complete inaction, refraining from cutting interest rates and declining to implement any other stimulus measures for the time being. Essentially, the BoE was signaling a “wait-and-see” approach to the continually unfolding saga of post-Brexit consequences. This inaction surprised the markets to a certain extent, leading to a short squeeze and temporary relief rally for the beleaguered British pound.
While inaction ruled the day in that July meeting, however, the central bank did state that “most members of the committee expect monetary policy to be loosened in August.” Though this was far from a promise, the statement served to indicate that the BoE did indeed have intentions to ease policy at its next available opportunity. That opportunity comes on Thursday, and the consensus opinion is indeed forecasting a rate cut of 25 basis points from the current 0.50% down to 0.25%, which would be a new record low.
June’s Brexit outcome resulted in GBP/USD immediately plummeting to a 31-year trough in the low-1.3000’s, finally hitting a tentative bottom at 1.2795 in early July. Since that low, the currency pair has rebounded modestly, especially after the noted BoE inaction in mid-July, but has been unable to climb above key resistance at the 1.3500 level. In the past few weeks since that decision, GBP/USD has been fluctuating in a relatively tight consolidation in preparation for Thursday’s BoE event.
As mentioned, the UK is widely expected to see an interest rate cut of 25 basis points on Thursday. As this potential outcome has been well-anticipated and largely priced-in to the struggling pound, such a rate cut and other potential stimulus measures could certainly weigh on sterling but will not likely result in greater losses than have already been suffered. In the event that BoE action meets expectations, the downside target for GBP/USD continues to reside around the important 1.3000 psychological support level.
However, in the unexpected event that the BoE again opts for inaction, or less action than anticipated, GBP/USD could see a significant boost. The key near-term target level in this event remains at the noted 1.3500 resistance level, but any breakout above 1.3500 could potentially see a further relief rally towards key 1.3800 resistance.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.