The British pound was in focus today as we waited for the Bank of England’s monetary policy announcement. The status-quo remains with the BoE monitoring inflation, employment, and the coronavirus situation. The fact that only one of the nine voters feels now is the time to reduce the asset purchases shows we have a long way to go before tighter monetary policy arrives.
British Pound Forex Analysis
The Bank of England’s Monetary Policy Committee (MPC) has kept the Bank Rate at 0.1%, in line with expectations. They also voted 7 to 1 to keep the central bank's Asset Purchases unchanged at £895 billion. The MPC sets monetary policy to meet a 2% inflation target with the aim of sustainable economic growth and employment.
Regarding recent price pressures, officials said that CPI inflation is projected to rise to 4% in the final quarter of the year before falling back to close to the bank's 2% target. The bank of England’s Broadbent said that the Breakeven measures of inflation have been stable and that is the most important measure of inflation.
"The Committee’s central expectation is that current elevated global and domestic cost pressures will prove transitory. Nonetheless, the economy is projected to experience a more pronounced period of above-target inflation in the near term than expected in the May Report," according to the MPC.
BoE Governor Bailey says if the MPC stuck with the 1.5% rate threshold for reducing QE that would be tantamount to saying the BoE was never going to do it. Currently, if the BoE raises rates to 0.5% that is their threshold for stopping reinvestments into the APF, if the rate rises to 1.0% this is the point where the bank starts selling assets. It will be interesting to see how the BoE does reduce the APF and how they move away from 0.1% as the UK economy opens up more.
BoE Governor Bailey said the Bank Rate is the main tool for altering monetary policy conditions and that negative rates are part of their toolkit. Back in February, the news was that banks had been given 6 months to prepare for negative interest rates, which should mean they are ready now. That announcement followed a speech by Silvana Tenreyro where she outlined the use of negative interest rates.
My main takeaway from the BoE decisions today is that they talk a Hawkish game but are in no place to currently tighten monetary policy. If inflation runs hot, they still maintain the narrative that it is transitory and while COVID variants dominate the uncertainty within the markets, the BoE is unlikely to move before the US Federal Reserve. Whether or not they surprise the markets with a reduction to the bank rate is probably down to whether we get a spike in COVID-19.
Today’ Current Sentiment
On the ActivTrader sentiment indicator, the bears reduced their positions by 6% but remain very negative towards the GBPUSD.
Today’s Current Technical Setup
On the hourly chart, the GBPUSD is in a descending channel, which I feel will break to the upside eventually and those bearish retail traders will get squeezed out of their positions unless they flip to being neutral or bullish. There is some clear resistance from yesterday’s highs with support from the 1.3870-1.3880 zone and the 200-period exponential moving average. Waiting for the hourly stochastic indicator to drop back into the oversold levels may be a good way to plan a long trade. Especially if the price can maintain above the hourly 200 ema.
I am looking for longs because the GBPUSD is currently holding up above the 20,50 and 200 daily ema’s and is in what looks to be a Bull Flag chart pattern. 1.4000 would be an obvious target to the upside but I have even higher with 1.4090-1.4100 as monthly resistance which from current levels is a good 200 pips higher.
The EURGBP continues to find support around 0.8500 which may be hindering further upside progress, but the US dollar index is also struggling to make new highs today having already failed once at yesterday's high. Timing a long GBPUSD trade should consider what the DXY is doing and if the EURGBP confirms by going the opposite way, even better.