The GBP/USD has staged a notable rebound from its post FOMC low around 1.38 to a test of 1.40 yesterday. Sterling bulls now wonder whether there could be a run back towards 1.41 and possibly even 1.42 but today’s price action will mainly hinge on the Bank of England rate decision.
The BoE is expected to leave its monetary policy unchanged while there is no updated monetary policy report. The focus will be instead on the guidance for QE and there are rising expectations for a relatively more hawkish Bank of England, signaling a shift in policy. If this is confirmed the pound could extend its recent rebound towards higher targets.
It will be the last rate decision for BoE’s Chief Economists Andy Haldane who steps down this month. Haldane is the BoE’s most outspoken contrarian and inflation hawk and his removal could see a more dovish tone at future BoE meetings. Even if Haldane votes in favour of a reduction in asset purchases, his vote could be dismissed by the market while more attention will be placed on whether other MPC members vote to curb the scale of the central bank’s asset purchase program. However, while risks are more skewed to the hawkish side, there is also danger of disappointment for bulls. Traders should brace for higher volatility around the decision at 11:00 UTC but should not expect too much from today’s meeting as the BoE is likely to wait until August for changes in its guidance and further tapering.
Given the more optimistic outlook in the U.K. traders brace for an extension of pound gains but given the Federal Reserve’s hawkish pivot gains might be limited in this pair. We see a next higher target at 1.4090. On the downside, the 1.38-handle has proved to hold. In case of a disappointment from the BoE, the pound could extend losses towards 1.3750 and 1.3650.
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