- Pound Sterling vs. US dollar weakens after BoE meeting following Andrew Bailey’s comments on easing inflationary pressures.
- Nevertheless, the BoE chairman adds that inflationary risks are still biased upwards and secondary effects persist.
- Another shooting star candlestick pattern is forming at the GBP/USD May highs, but requires confirmation from a bearish close.
The experience of the pound sterling (GBP) has increased volatility against the US dollar (USD) after Thursday’s Bank of England (BoE) monetary policy meeting. At the time of writing, it is trading at a lower 1.25s, showing a bearish short-term bias as investors digest the BoE event.
GBP/USD initially fell after BoE notification its decision by a 7:2 vote to increase interest rates by 0.25%, bringing the bank rate to 4.50%.
BoE Chairman Dovish’s opening remarks Andrew Bailey further weighed on the pair after saying the committee had good reason to believe headline inflation would fall significantly from April. Pound However, Sterling recovered later during Bailey’s press conference when he highlighted spillover effects and how “risks to inflation remain skewed to the upside as spillovers persist”.
The overall impression of the event was positive as the BoE revised its economic growth projections for the next two years from negative to positive.
Technically, GBP/USD remains in a long-term uptrend favoring longs over shorts.
Movements in the GBP/USD market
- The Bank of England (BoE) policy meeting is, as expected, without surprises. The BoE raises interest rates by 25 bps to 4.50% by a 7-2 vote, the same as at its last meeting.
- The BoE’s Bailey talks about how inflation figures will show a dramatic fall in April as the underlying effects of higher fuel and food prices from last year fall out of the equation.
- He talks about signs that inflation is easing more broadly, but then adds that the secondary effects of high inflation continue to persist and that risks to inflation going forward remain “skewed to the upside”. Sterling is recovering after these comments.
- Inflation in the UK is at 10.1%, more than double the 4.9% in the US. Core inflation is closer to 6.2% in the UK versus 5.5% in the US, however this suggests that the UK will need to continue raising rates after the Federal Reserve (Fed) pauses. This should benefit GBP versus USD as global investors favor currencies with higher interest rates to park their money.
- The CME Group FedWatch Tool shows a 90% probability that the Fed will not raise interest rates again. In addition, in its latest statement, the Fed removed the wording that further tightening of monetary policy would be necessary. The BoE, on the other hand, stuck to similar wording in its statement.
- The US dollar is threatened by the risk of a default on the US debt ceiling. US Treasury Secretary Janet Yellen warned on Thursday that a US failure to raise the debt ceiling would cause “economic and financial disaster”.
- The US Bureau of Labor Statistics released the producer price index (PPI) for April, with both the annual total (3.2% vs. 3.3% expected) and the core data (2.3% vs. 2.4% expected) missing expectations .
- The US Labor Department’s weekly Initial Jobless Claims disappointed with 264,000 new claims for unemployment benefits, which was more than the expected 245,000.
GBP/USD Technical Analysis: Shooting Star Reversal Seeks Confirmation
Broadly speaking, GBP/USD continues its established uptrend, making successively higher highs and higher lows, and this is likely to continue unless the price breaks below the May lows of 1.2435, which for now still favors GBP longs over shorts.
A Japanese shooting star formed in the market on Wednesday candlestick a reversal pattern on GBP/USD, indicating the possibility of a short-term bearish reversal. However, the formula is still awaiting confirmation from the bearish close on Thursday. Due to the sale after BoE meeting it now looks very likely. A bearish close on Thursday would pave the way for another short-term decline, likely to support at the base of the rising channel/wedge located around 1.2475.
The Relative Strength Index (RSI) is falling after showing a slight bearish divergence between the price at the May highs and the RSI. This is indicative of underlying weakness and further suggests a shorter-term downside.
Since the overall trend is bullish, the exchange rate is likely to recover and continue to strengthen. The May 2022 highs at 1.2665 provide the first level of resistance, but once broken open the way to the 100-week simple moving average (SMA) at 1.2713 and finally the 61.8% Fibonacci retracement of the 2021-22 bear market, at 1 ,2758. All provide potential upside targets for the pair. Each level will have to be decisively broken through to open the door to the next.
Decisive breakouts are characterized by long daily candles that break the relevant resistance levels and close near their highs or lows of the day (depending on whether the breakout is bullish or bearish). Alternatively, three consecutive candles that break the level can also be decisive. Such badges confirm that the breakout is not a “false breakout” or a bull/bear trap.
Frequently asked questions about the pound sterling
What is a pound sterling?
The pound sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded foreign exchange (FX) unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, as of 2022. data.
Its key trading pairs are GBP/USD aka ‘Cable’ which represent 11% of FX, GBP/JPY, or The ‘Dragon’ as traders know it (3%) and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
What impact do Bank of England decisions have on the pound sterling?
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary objective of “price stability” – a stable rate of inflation around 2%. Its primary tool to achieve this goal is the adjustment of interest rates.
When inflation is too high, the BoE will try to keep it in check by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for the GBP as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation drops too low, it is a sign of slowing economic growth. In this scenario, the BoE will consider cutting interest rates to make credit cheaper so businesses borrow more to invest in growth-creating projects.
How does economic data affect the value of the pound?
The data released assesses the health of the economy and can affect the value of the pound sterling. Indicators such as GDP, manufacturing and services PMI and employment can influence the direction of the GBP.
A strong economy is good for Sterling. Not only will this attract more foreign investment, but it may encourage the BoE to raise interest rates, which will directly strengthen the GBP. Otherwise, if the economic data is weak, the pound sterling is likely to fall.
How does the balance of trade affect the pound?
Another important data release for the pound sterling is the trade balance. This indicator measures the difference between what a country earns on exports and what it spends on imports for a given period.
If a country produces a highly sought-after export, its currency will benefit purely from the extraordinary demand created by foreign buyers looking to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa a negative balance.
