GBP/USD revival likely as dovish BoE may be priced in

One of the weakest currencies of late has been the pound. It has fallen viciously ever since the Bank of England Governor Mark Carney strongly hinted at the prospects of no interest rate rises this month, owing to weakness in UK data. Well the BoE is meeting next (Super) Thursday when the bank will also publish its latest economic and inflation forecasts. If the BoE were to raise interest rates on Thursday, this would come as major surprise now. But with the pound correcting itself over the past three weeks, we don’t think that BoE’s likely inaction would necessarily lead to further declines for the pound, for this outcome is mostly priced in now. What the pound does next will surely depend on the BoE’s revised growth and inflation targets and hints about the timing of the next rate rise. So, we are actually on the lookout for a potential GBP/USD revival.

We also think that the dollar’s rally may be overdone slightly in the short-term and are expecting at least a small pullback. But for now the greenback remains in a strong uptrend and even though the US non-farm payrolls report had more negative than positive surprises, the greenback was able to hold its own relatively well after an initial wobble. The headline jobs number came in at 64K vs. 190K expected, although the upward revision to the previous month’s total offset some of the disappointment, as too did the fact the unemployment rate fell more than expected to 3.9% from 4.1% previously. However average hourly earnings only rose by 0.1% month-over-month rather than 0.2% expected. Overall, Friday’s NFP report is unlikely to alter the thinking of the FOMC. Next week’s release of US CPI is more important we think, for the Fed is now only concerned about inflation rather than employment (which is at or near potential employment) as far as the pace of interest rate rises are concerned.

But heading into next week, sentiment is clearly negative towards the cable, which is actually another reason why we are looking for a bullish reversal. At the time of writing, the GBP/USD was actually testing a long-term support around the 1.35 handle. This level was the base of the breakout earlier this year, so it could turn into support. What’s more, we have the convergence of the 200-day moving average with the 127.2% Fibonacci extension level just ahead of this psychologically-important hurdle at around 1.3530. If we now see the formation of a bullish-looking daily candlestick or otherwise bullish price behaviour here then this would increase our confidence about a potential rally of some sort, possibly as early as the start of next week.  But if there’s acceptance below 1.35 then we would have to put our bullish views on hold.