GBP USD pressure mounts despite initial BoE bounce

The Bank of England (BoE) issued its official bank rate, monetary policy summary, and quarterly inflation report early on Thursday. The votes of the BoE Monetary Policy Committee’s nine members were unanimous in keeping the key benchmark interest rate steady at a record low 0.5%, as widely expected. Despite expectations having been met with respect to unchanged interest rates, three major themes stood out in the central bank’s comments on Thursday: 1) economic growth forecasts were cut, 2) inflation forecasts were raised, and 3) the BoE’s Brexit concerns are serious and mounting.

The GDP forecasts for 2016, 2017, and 2018 were all cut, with the 2016 forecast now at 2% from prior estimates of 2.2%. Meanwhile, the inflation forecast has risen to 2.1% by Q2 of 2018, which is above the BoE’s target inflation rate. Finally, the central bank provided a dire warning of negative consequences to the UK’s economy and currency that would likely stem from a Brexit, or a UK exit of the European Union, which will be voted upon in a late-June referendum.

Sterling rose in the immediate aftermath of the BoE’s announcements as currency traders focused more on the higher inflation forecasts and the absence of any mention or votes in favor of a potential interest rate cut. Despite this bounce, however, the fundamental picture for the pound continues to be fraught with substantial risk, especially with the June EU referendum looming only several weeks away. Pressures on the pound should continue to mount in the run-up to that Brexit vote.

From a technical perspective, GBP/USD continues to trade between its key 200-day moving average to the upside and the 50-day moving average to the downside. Both moving averages also continue to show a bearish trend bias. For more than a week, the currency pair has been falling from its early March high that approached the 1.4800 level. Price fell from that level as it turned down from key resistance imposed by the noted 200-day moving average and a key downtrend line extending back to the highs of last August. Thursday’s BoE statements prompted GBP/USD to rise briefly above the 1.4500 resistance level before later paring its gains and returning back below that level.

If the currency pair continues to trade under 1.4500, continued pressure on the pound could lead to a resumption of the long-term downtrend. With any breakdown below the noted 50-day moving average, the next major downside targets potentially reside around the 1.4250 support/resistance area followed by the key 1.4000 psychological support level, with February’s multi-year low of 1.3835 not far below that.

StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 69% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. CFD and Forex Trading are leveraged products and your capital is at risk. They may not be suitable for everyone. Please ensure you fully understand the risks involved by reading our full risk warning.

City Index is a trading name of StoneX Financial Ltd. Head and Registered Office: 1st Floor, Moor House, 120 London Wall, London, EC2Y 5ET. StoneX Financial Ltd is a company registered in England and Wales, number: 05616586. Authorised and regulated by the Financial Conduct Authority. FCA Register Number: 446717.

City Index is a trademark of StoneX Financial Ltd.

The information on this website is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement.