GBP/USD Forecast: Pound Sterling could rally with a BoE hold
- GBP/USD stays under bearish pressure in the European morning on Thursday.
- The BoE is expected to lower the policy rate by 25 basis points.
- Interest rate swaps see a nearly 40% chance of the BoE keeping bank rate unchanged.
After posting small gains on Wednesday, GBP/USD came under renewed bearish pressure and fell to its weakest level in three weeks below 1.2800 in the European morning on Thursday.
Economic Indicator
BoE Interest Rate Decision
The Bank of England (BoE) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoE is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Pound Sterling (GBP). Likewise, if the BoE adopts a dovish view on the UK economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for GBP.
Read more.Next release: Thu Aug 01, 2024 11:00
Frequency: Irregular
Consensus: 5%
Previous: 5.25%
Source: Bank of England
The US Dollar (USD) struggled to find demand in the American session on Wednesday and helped GBP/USD edge higher. The Federal Reserve (Fed) left its monetary policy settings unchanged as expected after the July meeting. In the post-meeting press conference, Fed Chairman Jerome Powell noted that there was a "real discussion" about the case for reducing rates at the meeting, adding that a rate cut could be on the table in September.
The Bank of England (BoE) is expected to lower its policy rate by 25 basis points to 5%. According to Reuters, interest rate swaps price in a nearly 40% chance of the BoE maintaining the bank rate. Hence, the interest rate announcement could trigger a significant market reaction.
In case the BoE holds the policy rate unchanged, the immediate reaction is likely to provide a boost to Pound Sterling and open the door for a decisive rebound in GBP/USD. On the other hand, Pound Sterling could weaken further in case of a 25 bps cut, even though that is the current market expectation.
Following the rate announcement, BoE Governor Andrew Bailey will deliver the policy statement and respond to questions at a press conference starting at 11:30 GMT.
GBP/USD Technical Analysis
GBP/USD was last seen trading below 1.2800, where the 200-period Simple Moving Average (SMA) on the 4-hour chart is located. In case this level stays intact as resistance, additional losses toward 1.2710-1.2700 (Fibonacci 61.8% retracement of the latest uptrend, psychological level) could be seen.
On the upside, 1.2830 (Fibonacci 50% retracement, descending trend line) aligns as first resistance before 1.2880 (Fibonacci 38.2% retracement) and 1.2900 (100-period SMA).
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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Author
Eren Sengezer
FXStreet
As an economist at heart, Eren Sengezer specializes in the assessment of the short-term and long-term impacts of macroeconomic data, central bank policies and political developments on financial assets.
