Bearish view
- Sell the GBP/USD pair and set a take-profit at 1.2580.
- Add a stop-loss at 1.2665.
- Timeline: 1-2 days.
Bullish view
- Set a buy-stop at 1.2650 and a take-profit at 1.2700.
- Add a stop-loss at 1.2600.
The GBP/USD exchange rate continued falling after the Bank of England (BoE) delivered a relatively dovish interest rate decision. It plunged to a low of 1.2640, its lowest swing since May 15th.
Fed and BoE divergence
There are signs that the Federal Reserve and the BoE have diverged on their monetary policies. In a decision on Thursday, the BoE left interest rates unchanged and signaled that it was ready to start cutting rates.
This decision came a day after the Office of National Statistics (ONS) said that the country’s inflation dropped to the target of 2.0% in May. Therefore, analysts expect the bank will start cutting rates in its next meeting in August.
The Fed, on the other hand, has maintained a fairly hawkish stance in the past few meetings. In its June meeting, the bank left rates unchanged between 5.25% and 5.50% and maintained a cautious outlook on the next cut.
The Fed is concerned about the state of inflation in the country. While the headline CPI has fallen for two straight months, it remains above 3% and is not falling fast enough. Therefore, the Fed has hinted that it will continue being patient.
Most analysts expect that the Fed will deliver its first interest rate cut in its December meeting as long as inflation nears its 2% target. As such, the spread between the Fed and BoE interest rates creates a good carry trade opportunity where people borrow in low rates environment to invest in higher rates.
Looking ahead, there will be several important macro data this week. In the US, the Conference Board will release its consumer confidence figure while the statistics agency will publish the Personal Consumption Expenditure (PCE) report. PCE is a better inflation data because it considers rural and urban products.
GBP/USD technical analysis
The GBP/USD pair has been in a strong bearish trend after rising to 1.2860 earlier this month. It then made a bearish breakout after the BoE decision. Before that, it had formed a rising wedge pattern, a popular bearish sign.
It has now dropped below the key support at 1.2687, its lowest swing on May 24th and June 10th. The pair has remained below the 50-period and 25-period moving averages. It has also dropped below the 38.2% Fibonacci Retracement point.
Therefore, the path of the least resistance for the pair is bearish, with the next point to watch being the 50% retracement point at 1.2580.
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