- The pound has weakened across the board as the odds of a Bank of England rate cut continue to rise steadily, with markets now pricing in a cut today.
- Ahead of today’s big announcement, GBP/USD is hovering around the 1.2800 support level, its lowest in nearly a month.
In general, money market rates, compiled from the overnight index swap market, show the odds of a rate hike now above 60%. This was up from 40% earlier in the month when markets judged strong service sector inflation figures to mean the Bank would have to wait until September before cutting rates. Moreover, the rising odds of a rate cut on August 1 have been linked to a steady decline in the value of the from its recent highs against both the euro and the dollar.
If the bank continues to cut rates, it will lead to further weakness in sterling as the gap between reality and expectations closes completely. “The cut could be seen as a slightly more dovish outcome than markets currently expect, and therefore weighs on sterling,” said Valentin Marinov, FX analyst at Credit Agricole.
“We expect the BoE to vote 5-4 in favor of a 25bp rate cut at its meeting this week. We believe the decision is close,” said Sonali Punhani, an economist at Bank of America. “The risks are asymmetrically skewed towards a weaker pound if the BoE cuts rates,” added some analysts.
Sterling could rally if the BoE leaves rates unchanged, but we expect the strength to be limited. This is because if the Bank chooses to keep rates unchanged in August, the decision will be accompanied by a clear signal that it expects a rate cut in September. As such, sterling will weaken as the likelihood of a September rate cut increases. Commenting on the important event, Andrew Goodwin, chief UK economist at Oxford Economics, said: “We expect the MPC to keep rates unchanged at its next meeting on 1 August. We expect the MPC to use the Monetary Policy Report and press conference to prepare for a September rate cut.”
Barclays economists expect the Bank of England to cut rates next Thursday, based on “the stated preference in June by the MPC core to start easing soon.”
However, Barclays currency strategists believe that the downside for sterling will be limited. “A hawkish MPC cut presents an opportunity for sterling.” As such, interest rate differentials should not be affected much by the reallocation of cuts across the cycle, which would mean limited damage to GBP. Instead, the resilience of demand and the willingness to re-engage with the EU are much more positive for GBP, in our view, and we look to re-engage on the long side in the event of any further weakness.
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Technical forecasts for the GBP/USD pair today:
The bearish trend reversal in GBP/USD continues and a break of the 1.2800 support will increase the downside momentum. Consequently, this prepares for stronger losses and technical indicators could move towards strong oversold levels if it moves towards the 1.2720 and 1.2600 support levels respectively. In contrast, according to the performance on the daily chart, there will be no bullish trend reversal without a return to the psychological resistance area of 1.3000. ultimately, both directions will depend on the reaction to the BoE announcement and the US jobs numbers.
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