GBP/USD rebounds ahead of Bank of England rate decision

GBP/USD rallied from near its recent lows on Monday as the US dollar fell on concerns that last week’s Bank of Japan cut to negative interest rates may translate into a significantly more dovish Federal Reserve. Sterling also rose broadly against other major counterparts on Monday, including the euro and yen.

This relief rally for the long-embattled GBP/USD currency pair occurs in the midst of a relatively tight consolidation and modest upside pullback within the context of a strong, long-term downtrend.

This week brings several important economic events and data releases from both the UK and the US that could likely affect both the short- and medium-term biases for GBP/USD. From the UK, the most important events scheduled this week fall on Thursday. On that day, the Bank of England (BoE) will release its key interest rate decision and monthly monetary policy summary, along with a crucial inflation report. Although the BoE is not expected to raise interest rates during Thursday’s meeting, the content of the monetary policy summary will be closely watched for any hints of dovish/hawkish nuances. The BoE’s inclination to follow the Federal Reserve’s lead in raising interest rates is already shrouded in increasing doubt and uncertainty. With the recent Bank of Japan move to cut interest rates into negative territory, this doubt could well be amplified. If this is the case, and Thursday’s BoE policy summary is seen as even more dovish than expected, this could lead to a significant drop for the British pound.

Across the pond, the most important US data release this week will clearly be the non-farm payrolls report on Friday. This vital barometer of the US employment situation could either help or hinder the chances and timing of further Fed rate hikes, depending on the outcome.

From a technical perspective, GBP/USD continues to trade within a strong downtrend above its nearly six-year low of 1.4078 that was just hit little more than a week ago. Since that low, the currency pair has been attempting to rise in an oversold relief rally but has been unable thus far to climb substantially off its lows. In the process, a bearish flag pattern has been formed. Provided that GBP/USD does not rise above the 1.4500 resistance level, this pattern and bearish bias should remain intact. In this event, the currency pair could be poised for a breakdown of the pattern to new lows, in which case the next major downside target is at the 1.4000 psychological support level. Further to the downside, on any break below 1.4000, the next major price objective on a longer-term continuation of the sharp downtrend is at the 1.3600 level.

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