GBP/USD remains pressured after dovish Bank of England
James Chen, CMT January 14, 2016 11:00 AM
GBP/USD remained pressured on Thursday after the Bank of England (BoE) opted to keep its main interest rate unchanged at 0.50%, as widely expected. The BoE’s Monetary Policy Committee voted 8-to-1, as has been the case for the past several monthly meetings, to keep rates at a record low level. The central bank also decided to maintain its current level of quantitative easing measures.
Accompanying the BoE’s rate decision was a rather dovish statement underlining the global economic conditions that precluded a rate hike, including depressed economic growth both in the UK and in emerging markets, as well as low oil prices placing pressure on global inflation. With these conditions currently prevailing, the BoE’s dovish stance cast further doubt on any expectations that a rate hike in the UK, to follow the Fed’s December hike, would occur anytime soon, or even this year.
From an immediate perspective, the monetary policy summary failed to make a substantial negative impact on GBP/USD due to the fact that an unchanged interest rate and dovish BoE were largely expected and priced-in to the markets. From a longer-term perspective, however, as the US Federal Reserve is already entrenched in its own monetary tightening cycle after December’s initial hike, the BoE’s potentially prolonged delay in following suit could continue to weigh on GBP/USD.
As for the US dollar, while US weekly unemployment claims on Thursday came out greater than expected at 284,000, the figure is still well within the bounds of a strong labor market. As a result, the dollar was not substantially impacted by this data.
From a momentum perspective, the trend for the past several months has been undeniably to the downside, with an acceleration of that bearish momentum occurring in mid-December. During this past month’s plunge, GBP/USD swiftly broke down below successively lower key support levels, including 1.5000, 1.4800, 1.4600, and most recently, 1.4500. This precipitous drop culminated earlier this week in a new 5½-year low of 1.4350.
Clearly, GBP/USD is displaying a distinct pattern of trending weakness that has extended the well-defined formation of lower lows and lower highs that has been in place since the 1.5900-area in June of last year. With continued weakness under the 1.4500 level, the next major downside targets are at the key 1.4250 support area and the 1.4000 psychological support level.
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