GBP/USD Daily Forecast – Will the Bank of England Cut Rates?

It started at the November meeting when two members of the BoE’s monetary policy committee voted for a rate cut. Since then, more members have expressed dovish views although analysts and the markets are divided as to whether policymakers will, in fact, deliver a rate cut today.

Those arguing against a rate reduction will point to the improvement in the labor markets and the better than expected PMI data that we saw last week.

But it remains to be seen if the recent data improvement is enough to stave off concerns of a slowing economy.

The only certainty going into the meeting is that, at the very least, the same two members that voted for a cut at the last two meetings will continue to do so. Out of the nine voting members, five will need to vote in favor of monetary easing to seal a rate reduction today.

A rate cut is expected to have bearish consequences for the pound to dollar exchange rate which has been teetering above the psychological 1.3000 price point over the past few days.

If the Bank of England does not cut rates, forward guidance will be important. In such a scenario, a likely outcome might be that they will continue to monitor incoming data, leaving the door open for policy easing at the next meeting.

The BoE last cut rates almost four years ago, shortly after the Brexit vote.

Technical Analysis

A major horizontal level at 1.2961 has held the exchange rate higher twice now over the past few weeks and is in focus in the session ahead.

The level is considered important not only because it has held the pair higher in the second half of January, but also as it acted as a major resistance level in the fourth quarter last year.

A break below it is likely to see an acceleration in downside momentum, and at this point, will probably only happen if policymakers move forward with a rate cut.

In terms of bullish potential, GBP/USD faces some resistance at 1.3050 but a level to watch in the session ahead comes in at 1.3109. This price point stands to contain a recovery rally if one were to occur.

The most bullish scenario for GBP/USD would be if the BoE removes its dovish bias and rules out policy easing. In such a scenario, it would not be surprising to see the pair rally to fresh highs for the month above 1.3200.

Bottom Line

• Investors await the BoE meeting with a fair amount of uncertainty as to what policymakers will do.
• A rate cut stands to trigger a break below major support at 1.2961.
• 1.3109 is the first level of interest for recovery rallies.