GBP/USD Probes Major Support Area Ahead of BoE Decision

The British pound has come under pressure against the dollar after briefly trading at a three-month high above 1.2800 last week.

Recent bearish pressure is attributed to a stronger dollar which has dampened the rally in most of the major currencies. However, Sterling’s fate may be determined by the outcome of today’s Bank of England meeting.

There was speculation last month that the central bank may act more aggressively this time around after several MPC members  revealed that negative interest rates were not being ruled out.

However, in today’s meeting, analysts expect that rates will be held on hold and that policymakers will increase the size of their asset purchase program instead.

Last month, two members voted to increase the program by 100 billion pounds. This has set a baseline for today’s meeting with several analysts expecting policymakers to ease by a much larger amount.

The size of today’s easing should have some impact on the exchange rate. The larger reaction stands to come from forward guidance. Especially if the Bank once again mentions that it has not ruled out negative rates.

Technical Analysis

GBP/USD made a fake break above its 200-day moving average last week which may have trapped some bulls. At this stage, the pair is testing an important support area.

Support stems from a horizontal level at 1.2500 which served to hold lower from the rally in March. Further, the pair is also testing a rising trendline that originates from the low in mid-May.

A decline below support could lead to an acceleration of downside momentum in the current correction. On the other hand, if the pair manages to hold above support, bulls will view it as a sign that the uptrend remains intact.

Bottom Line

• GBP/USD is testing a major support confluence near 1.2500. The reaction from here should set the near-term tone.
• The Bank of England is expected to increase the size of its asset purchase program by at least 100 billion pounds at its meeting today.

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