The British pound (GBP) is currently treading water against the US dollar (USD) in a tense wait-and-see approach ahead of the Bank of England’s (BoE) highly anticipated interest rate decision. While analysts widely expect the BoE to maintain the current rate of 5.25%, the future trajectory of monetary policy remains a key question mark.
Market participants are particularly interested in any hints the BoE might offer regarding potential rate cuts. Recent economic data paints a mixed picture: inflation has cooled considerably, dropping to 3.2% in March 2024, nearing the central bank’s target of 2%. However, wage growth remains a concern, and some forecasts suggest a potential dovish shift from the BoE, with a possibility of a rate cut as early as June. This speculation is reflected in money markets currently pricing in a 96% chance of a rate hold but with a 55% chance of a cut in June and a 72% chance by August.
This dovish tilt from the BoE could trigger a depreciation of the pound. Investors often seek currencies backed by central banks with hawkish monetary stances, as higher interest rates tend to translate into stronger currencies. Conversely, a dovish central bank could signal a weakening currency.
Technical Analysis
The GBPUSD price action reflects the current uncertainty surrounding the BoE’s policy stance. The currency pair is trading comfortably below the 20-SMA and 50-SMA and recently experienced a bearish breakout from the 100-SMA, currently situated at 1.25393.
With the RSI (38.10) trading comfortably below the 50.00 level, a sustained break below the wedge could offer short-term continuation towards the 1.24277 support level. A sustained break below the initial support level could open the doors for further downside towards 1.23643 and 1.22993.
However, a potential retracement could present short-term buying opportunities towards the 1.25393 resistance level. A bullish breakout from this level could see GBPUSD target 1.26095 and even reach as high as 1.27091 in the near term.
Summary
The GBPUSD price action hinges on the BoE’s upcoming decision. Dovish hints towards rate cuts, coupled with the current technical weakness, could see the pound depreciate further in the near term. Conversely, a hawkish stance from the BoE or a surprising rate hike could trigger a short-term rally.
Sources: TradingView, Trading Economics, Reuters, Forex Live.
Piece written by Mfanafuthi Mhlongo, Trive Financial Market Analyst
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