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British Pound Remains Heavily Oversold- BoE Rate Decision in Focus

British Pound Remains Heavily Oversold- BoE Rate Decision in Focus

David Song, Strategist
British_Pound_Remains_Heavily_Oversold-_BoE_Rate_Decision_in_Focus_body_Picture_1.png, British Pound Remains Heavily Oversold- BoE Rate Decision in Focus

British Pound Remains Heavily Oversold- BoE Rate Decision in Focus

Fundamental Forecast for British Pound: Neutral

The British Pound tumbled to a fresh yearly low of 1.4984 amid the heightening threat for a triple-dip recession in the U.K., and the sterling may face additional losses in the week ahead should the Bank of England (BoE) show a greater willingness to ease monetary policy further. Beyond the credit-rating downgrade from Moody’s Investor Services, a growing number of central bank officials struck a rather cautious tone for the region amid the ongoing slack in the real economy, and we may see a growing rift within the Monetary Policy Committee as the BoE keeps the door open to expand the balance sheet further.

Although the BoE is widely expected to maintain its current policy in March, Governor Mervyn King, Paul Fisher and David Miles may make another push to expand the asset purchase program by another GBP 25B, and we may see a growing number of MPC officials call for more quantitative easing in an effort to encourage a stronger recovery. However, the majority may continue to endorse a neutral policy stance as the committee anticipates a slow and sustainable recovery in the U.K., and the central bank may stick to the sidelines throughout the first-half of 2013 as the Funding for Lending Scheme continues to work its way through the real economy. Although the BoE retains the flexibility to ramp up its asset-purchase program, Deputy Governor Charles Bean saw limited scope to implement negative interest rates, and we may see the central bank slowly move away from its easing cycle over the coming months as price growth is expected to hold above the 2% target throughout the policy horizon. As U.K. policy makers anticipate a faster recovery this year, the MPC may continue to highlight the upside risk for inflation, and we may see the BoE scale back its willingness to introduce more QE as the central bank sees a limited risk for a triple-dip recession.

The GBPUSD looks poised for a near-term correction as the relative strength index sits in oversold territory, but we will need to see a break and a close above the 30 figure to see a more meaningful rebound in the exchange rate. In turn, the BoE rate decision may serve as the fundamental catalyst to spark a rebound in the British Pound, but we may see the central bank refrain from releasing a policy statement as it sticks to the sidelines. - DS

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