GBP/USD slumps after BoE vote

The Bank of England has left interest rates unchanged with only two of its MPC members voting in favour of a hike this month. No other rate setter decided to join Michael Saunders and Ian McCafferty on this occasion, and this disappointed some market participants who were hoping that more would join them.

The penultimate Inflation Report of the year has also releveled the Bank has lowered its growth forecasts and wage inflation projections. The market’s reaction was swift: the pound fell sharply and this helped to boost the FTSE 100, as the focus turned to Mark Carney’s press conference, which had just started at the time of this writing.

Prior to the BoE’s policy announcement and the Inflation Report, the pound had been rising to new 2017 highs against the U.S. dollar. The British pound/U.S. dollar (GBP/USD) currency pair’s advance was mainly due to a weaker U.S. dollar than a stronger pound, for not many people were expecting anything more than a 6-2 vote to keep rates and QE unchanged, let alone a rate hike, from the BoE. The recent acceleration in the general level of prices in the UK has not been matched by a corresponding increase in wage inflation, even if other macro pointers have improved steadily. What’s more, the UK government still hadn’t secured a transition deal in place for Brexit.

So, the immediate reaction of the pound to the BoE’s inaction may be overdone a little bit. However, the dollar selling also looks overdone, at least for the time being. Speculators have evidently reduced their short dollar positions against a number of major currencies in the past few days, most notably against the commodity currencies, ahead of key US data in the coming days. But even the EUR/USD has moved down a little after hitting a new 2017 high above 1.19 yesterday. 

Thus, if the pound were to bounce back later this afternoon or in the coming days, then its best bet would be against its weaker rivals, unless the upcoming US data point to further deterioration in the US economy, in which case the cable could also rebound. 

For now, though, the GBP/USD looks like it wants to head lower, especially if it manages to break the key 1.3150 short-term support level on a daily closing basis. But even so, the longer term outlook would not materially change until there is a break in market structure. The bears have lots of wood to chop, so it probably won’t be smooth sailing. Any move back above 1.3190 or ideally 1.3240 would re-establish the bullish bias, unless a key bullish signal is formed at lower levels first.