BOE Preview: A rate hike or no rate hike, GBP/USD set to fall?

GBP/USD is languishing at three-week lows heading into the Bank of England (BOE) ‘Super Thursday’, as uncertainty looms over a potential first-rate hike since the coronavirus pandemic hit the global economy.

BOE in a tricky spot

The BOE is set to leave the benchmark interest rate unchanged at a record low of 0.1% in its November monetary policy meeting, defying expectations – now at 55% probability – that it will hike rates, as per the CME BOEWatch Tool.

Markets also foresee the big-budget announcement by Finance Minister Rishi Sunak as a factor that could lead the central bank to raise rates.

That said, a hike cannot be ruled out if the UK central bank yields to market pressure to contain rising inflationary risks. Although it seems to be a minor possibility for now, the voting composition on a probable rate lift-off from the central bank’s nine Monetary Policy Committee (MPC) members would rock the pound.

Amidst an ongoing battle to curb the rising price pressures while stimulating the post-pandemic economic recovery, the UK central bank remains in a dilemma over its next policy move.

The BOE meeting’s minutes, accompanying the policy statement will likely justify the changes in the voting composition, showing divisions among MPC members.
Rising expectations that inflation in the UK will rise to more than double the BOE’s 2% target combined with persistent Brexit concerns over fishing rights and Northern Ireland (NI) protocol could likely keep BOE hawks from wanting to act.

Last month, BOE Governor Andrew Bailey ramped up rate hike expectations when he said that policymakers would “have to act” if the surge in energy prices led people to expect higher inflation in the medium term.

Meanwhile, at the previous policy meeting, the central bank policymakers Dave Ramsden and Michael Saunders cheered hawks. Conversely, the BOE’s new Chief Economist Huw Pill and external MPC member Catherine Mann have expressed concerns over earlier monetary policy tightening.

GBP/USD probable scenarios

GBP/USD is licking its wounds in the lead-up to the critical Fed and BOE monetary policy decisions. Traders of the pound have refrained from placing any directional bets, with the Fed likely to announce tapering, as widely expected.

The US dollar could face a sharp headwind if Fed Chair Jerome Powell fails to provide any substantial guidance on potential rate hikes, in light of growing concerns over inflation and the pace of economic recovery, which could revive bullish interest in the pound.

Cable traders will remain watchful before the BOE decision, which will have a significant impact on GBP in the coming months. The GBP/USD technical setup on the four-hour chart offers a bearish outlook, which coincides with the premise that the BOE could turn out to be less hawkish than expected.

A pair of bear crosses on the said timeframe combined with the Relative Strength Index (RSI) trading well below the midline, adds credence to a likely downslide in the currency pair. The 21-Simple Moving Average (SMA) has cut the 200-SMA from above and the 50-SMA has breached the horizontal 100-SMA.

A sustained break below 1.3600 could knock rates down towards the October 12 lows of 1.3568, below which the next crucial horizontal trendline support awaits near the 1.3550 region. On the upside, an initial supply zone is seen at 1.3652, – the rising trendline support now resistance – above which the 21 and 200-SMAs confluence at 1.3677 will be challenged. The next relevant upside barrier is seen around 1.3725, where 50 and 100-SMA meet.

GBP/USD: Four-hour chart