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GBP/USD May Fall as the Bank of England Strikes a Gloomy Tone

BRITISH POUND, BANK OF ENGLAND – TALKING POINTS:

  • Bank of England monetary policy announcement in the spotlight
  • Updated economic outlook may foreshadow stimulus expansion
  • GBP/USD may suffer, first layer of support just above 1.22 mark

A monetary policy announcement from the Bank of England (BOE) headlines the economic calendar on Thursday. In addition to the latest decision from the rate-setting MPC committee and the minutes of its meeting, the markets will get an updated quarterly Inflation Report (QIR) laying out the central bank’s latest economic forecasts and the latest guidance on what actions it may take in the months ahead.

UK economic data has echoed the sharp deterioration elsewhere amid the Covid-19 outbreak. News flow has dramatically deteriorated relative to baseline expectations and PMI surveys flag an ‘unprecedented’ downturn. Nevertheless, financial conditions have eased a bit since the Federal Reserve leaned in to arrest credit crisis risk last month, so the BOE may opt to hold back further action of its own for now.

The severity of the downgrade in the central bank’s base-case projections may all but assure that stimulus expansion is in scope. In fact, officials might even say openly – as they have done before – that validation of their preferred scenario would necessitate action. That might weigh on the British Pound as well as undermine broader market-wide risk appetite, boosting the anti-risk US Dollar.

GBP/USD TECHNICAL ANALYSIS

Turning to the price chart, GBP/USD looks to be probing below rising trend line support capping losses over the past month. A break below that sees the next downside barrier at 1.2210, the 23.6% Fibonacci expansion. A breach of that with confirmation on a daily closing basis looks likely to set the stage for a test of the 1.1949-1.2016 area, marked by the October 2016 bottom and the 38.2% expansion.

GBP/USD May Fall as the Bank of England Strikes a Gloomy Tone

GBP/USD daily chart created with TradingView

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— Written by Ilya Spivak, Currency Strategist for DailyFX.com

To contact Ilya, use the comments section below or @IlyaSpivak on Twitter