For the GBPUSD currency pair, this week has two pieces of news to pay attention to: firstly, yesterday's interest rate vote by the members of the Bank of England, and secondly, today's publication of the U.S. labor market data.
Bank of England Governor Andrew Bailey put the British central bank on a clear path to rate cuts. He also gave investors a few reasons to think the journey for policy makers in London may take longer than for those in Washington and Frankfurt.
Turmoil in the Middle East, price pressures at home, the government’s fiscal policy and even rising living standards could reignite inflationary pressures and force the BOE to keep rates at a 16-year high for longer than investors are betting.
His remarks set out what the BOE calls “upside” risks to its forecasts for a sunnier economic climate, with inflation slowing toward the 2% goal and a growth ticking higher. They explain why the BOE, which was the first major central bank to lift rates in 2021, now is likely to remain at the back of the pack when it comes time to ease.
The remarks follow a decision by the BOE’s nine-member Monetary Policy Committee to leave the benchmark lending rate at a 16-year high of 5.25%. While officials dropped earlier guidance that rates may have to rise again, they also said they need more signs that inflation, now 4%, will fall and stay down sustainably.
The BOE expects services inflation to drop to 4.9% in June from 6.4% now, but that would still be more than double the target for inflation in the broader economy. The headline Consumer Prices Index is expected to glide down to 2% by June but then bounce back up to 2.8% as the effect of falling energy prices over the last year drops out of comparisons.
Investors are betting the BOE will reduce its key rate a full percentage point this year, probably starting in June. That is, the downward pressure on the British pound still exists.
As for the U.S. dollar, if the labor market turns out to be "hot" according to today's report, it will strengthen the American currency, i.e. GBPUSD will get a downward momentum. This scenario can be confirmed from the point of view of technical analysis — the target is at the level of 1.2680.
The overall recommendation is to sell GBPUSD if the U.S. labor market today shows strength above the forecasted values. A profit should be taken at the level of 1.2680.
A loss should be fixed at the level of 1.2820.
This content is for informational purposes only and is not intended to be investing advice.
