- GBP/USD navigates its third consecutive session of losses.
- Weakness is expected to accelerate below the 200-day SMA.
- Markets’ attention shifts to the BoE’s Super Thursday.
So far on Wednesday, GBP/USD trades slightly on the defensive around the 1.2500 neighbourhood amidst rising investors’ prudence prior to the BoE’s Super Thursday.
Also adding to Cable’s downward bias is the continuation of the constructive trend in the Greenback, which remains propped up by further selling in the US bond market, which in turn morphs into an extra upside in US yields across the curve.
Still around the US Dollar (USD), Tuesday’s comments from Minneapolis Federal Reserve President Neel Kashkari appear to have lent extra legs to the currency after he expressed a more optimistic stance on the housing market's resilience to monetary tightening while suggesting the possibility of further policy adjustments if inflation persists.
In the meantime, the broad-based narrative pointing to increasing policy divergence between the Federal Reserve (Fed) and the rest of its G10 peers continues to dominate market sentiment and is expected to keep the US Dollar on the positive foot in the near-to-medium term.
According to CME Group’s FedWatch Tool, there is around a 65% probability that the central bank will reduce its interest rates at the September 18 gathering.
Moving forward, the Bank of England (BoE) will reveal its monetary policy decisions later on Super Thursday. While the “Old Lady” is largely anticipated to keep its policy rate unchanged at 5.25%, the persistent decline in domestic inflation and expectations of a sustained drop in consumer prices in the next few months open the door to a potential dovish tone at the bank’s meeting, which could, in turn, keep the selling pressure around the British pound intact.
GBP/USD Technical Analysis
Immediately to the upside in GBP/USD now emerges the key 200-day SMA at 1.2542. Once the pair clears this region, it could then embark on a potential challenge of the so-far May top at 1.2634 (May 3). Further up comes the April peak at 1.2709 (April 9), ahead of the weekly high of 1.2803 (March 21). Extra gains from here should retarget the 2024 top of 1.2893 (March 8) prior to the weekly peak of 1.2995 (July 27, 2023), and the psychological 1.3000 yardstick.
Conversely, initial support is found at the 2024 bottom of 1.2299 (April 22), seconded by the weekly low of 1.2187 (November 10, 2023). If bears breach the latter, Cable could then attempt a move to the October 2023 bottom of 1.2037, ahead of the crucial contention zone of 1.2000. In addition, the day-to-day RSI slips back to around 46.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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