GBP/USD at Risk of Sub-$1.12 Following a Divided MPC Vote

It was a quiet start to the day on the economic calendar, with no UK economic indicators to distract the markets ahead of the BoE monetary policy decision. The lack of stats left the Pound in recovery mode early in the European session.

On Wednesday, the GBP/USD pair fell to its lowest level since 1985 on policy and economic divergence.

Ahead of the BoE monetary policy, there was a rise in bets of a 75-basis point rate hike to curb inflation and pre-empt tomorrow’s mini-budget that threatens persistent inflation through increased demand.

However, the Bank of England played it safe, lifting rates by 50 basis points to 2.25%. Monetary policy members voted unanimously for a rate hike, though three voted for a 75-basis point hike and one in favor of a lesser 25-basis point hike.

Today’s vote revealed a divided MPC that needs to be aligned to tackle inflation and ensure a soft landing.

Salient points from the MPC meeting minutes included,

• The most material news since the MPC’s last meeting related to fiscal policy and the Growth plan.
• An Energy Price Guarantee reduces the near-term inflation outlook and also limits the impact on household spending.
• Since the August report, there were further signs of domestically generated inflation.
• With labor market conditions tight, the Guarantee reduced inflation near-term, pointing to less weak household spending, which supports more persistent domestic price and wage pressures.
• In November, the MPC would make a full assessment of the impact on demand and inflation and determine the implications for monetary policy.
• The impact of the Energy Price Guarantee means that the pressure of demand relative to supply was likely to be stronger than previously expected.
• Going forward, the scale, pace, and timing of any further changes in the Bank Rate would reflect the MPC’s assessment of the economic outlook and inflationary pressures.
• The MPC would respond forcefully should the outlook suggest more persistent inflationary pressures.

With Monetary Policy Committee members preparing for Thursday’s policy decision, there were no MPC speeches to influence sentiment ahead of the main event. However, MPC members Silvana Tenreyro and Jonathan Haskel will speak later today.

GBP/USD Price Action

At the time of writing, the Pound was up 0.37% to $1.13076.

A choppy session saw the GBP/USD slide to an early low of $1.12113 before striking a high of $1.13639. The Pound tested the First Major Resistance Level (R1) at $1.1355 before easing back.

Technical Indicators

The Pound needs to avoid the $1.1295 pivot to retarget the First Major Resistance Level (R1) at $1.1355 and the Wednesday high of $1.13848. Today’s policy decision and MPC meeting minutes were more hawkish but failed to narrow the policy divergence with the Fed.

However, in case of an extended rally, the GBP/USD would likely take a run at $1.14 and the Second Major Resistance Level (R2) at $1.1445. The Third Major Resistance Level (R3) sits at $1.1595.

A fall through the pivot would see the Pound test the First Major Support Level (S1) at $1.1205. In the case of an extended sell-off, the Pound would test the Second Major Support Level (S2) at $1.1145.

The Third Major Support Level (S3) sits at $1.0995.

Looking at the EMAs and the 4-hourly chart, the EMAs send a bearish signal. The GBP/USD sits below the 50-day EMA, currently at $1.14270.

The 50-day fell back from the 100-day EMA, with the 100-day EMA easing back from the 200-day EMA, delivering bearish signals.

A GBP/USD move through R1 ($1.1355) would bring the 50-day EMA ($1.14270) and R2 ($1.1445) into play. However, failure to move through the 50-day EMA would leave the Pound under pressure.

The US Session

It is a quiet day ahead on the US economic calendar. Early in the US session, US jobless claims will draw interest. However, barring dire numbers, the stats are unlikely to shift the FED’s outlook on interest rates.

Away from the numbers, FOMC member chatter would influence following Wednesday’s hawkish policy move. With the Dollar Spot Index now sitting around the 111 level, it will be down to other central banks to catch up with the Fed. However, economic conditions for many economies may not permit it.