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GBP/USD Rate Recovery to Persist If BoE Alters Forward Guidance

GBP/USD Rate Recovery to Persist If BoE Alters Forward Guidance

David Song,
GBPUSD 2-Hour Price Chart

British Pound Rate Talking Points

GBP/USD trades near the October-high (1.3013) ahead of the Bank of England’s (BoE) meeting, and the updates to the quarterly inflation report (QIR) may influence the British Pound as the narrowing threat of a no-deal Brexit raises the scope for higher UK interest rates.

Fundamental Forecast for British Pound: Neutral

The British Pound may stage a larger correction as European Union (EU) President Donald Tusk ‘formally’ delays Brexit to January 31, and the BoE may respond to the development by adjusting the forward guidance for monetary policy.

Even though the BoE is widely expected to retain the current policy, fresh developments coming out of the central bank may sway the near-term outlook for GBP/USD as Governor Mark Carney and Co. release the QIR, which is now named the Monetary Policy Report.

The BoE may change its tune ahead of the general election on December 12 as the UK lawmakers take steps to avoid a hard Brexit. In response, the Monetary Policy Committee (MPC) may show a greater willingness to implement higher interest rates as “a significant margin of excess demand was likely to build in the medium term” in the event of a smooth departure from the EU.

In turn, the BoE interest rate decision may fuel a larger recovery in GBP/USD if the MPC emphasizes that “increases in interest rates, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target.”

However, Governor Carney and Co. may stick to the same script as the leader of the Labour Party, Jeremy Corbyn, pledges to negotiation a “sensible” deal with the EU if he wins the election. As a result, more of the same from the BoE may rattle the recent advance in GBP/USD as the uncertainty surrounding Brexit keeps the central bank on the sidelines.

With that said, an adjustment in the BoE’s forward guidance may impact the near-term outlook for the British Pound, but the recent shift in retail sentiment may persist over the coming days as GBP/USD holds near the October-high (1.3013).

GBPUSD Client Positioning

The IG Client Sentiment Report shows 49.38% of traders are net-long GBP/USD compared to 62.16% on October 12, with the ratio of traders short to long at 1.03 to 1.

The number of traders net-long is 6.01% lower than yesterday and 6.32% lower from last week, while the number of traders net-short is 7.83% higher than yesterday and 0.61% higher from last week.

The decline in net-long position points to profit-taking behavior as GBP/USD trades near the October-high (1.3013), while the rise in net-short interest offers a contrarian view to crowd sentiment as the exchange rate breaks out of the downward trend from earlier this year.

Sign up and join DailyFX Currency Strategist David Song LIVE for an opportunity to discuss potential trade setups.

GBP/USD Rate Daily Chart

GBPUSD Daily Price Chart

Source: Trading View

Keep in mind, the broader outlook for GBP/USD remains capped by the Fibonacci overlap around 1.3310 (100% expansion) to 1.3370 (78.6% expansion) as it lines up with the 2019-high (1.3381).

Nevertheless, GBP/USD may stage a larger correction as it breaks out of the downward trend from earlier this year, with a move above the October-high (1.3013) bringing the 1.3090 (38.2% retracement) region on the radar.

However, recent developments in the Relative Strength Index (RSI) offers a mixed signal as it falls back from overbought territory, with the oscillator struggling to push back above 70.

In turn, failure to clear the October-high (1.3013) may generate a near-term pullback in Pound Dollar, with a break/close below the 1.2800 (50% expansion) handle raising the risk for a move back towards the Fibonacci overlap around 1.2630 (38.2% expansion) to 1.2640 (38.2% expansion).

Additional Trading Resources

For more in-depth analysis, check out the 4Q 2019 Forecast for GBP/USD

Are you looking to improve your trading approach? Review the ‘Traits of a Successful Trader’ series on how to effectively use leverage along with other best practices that any trader can follow.

Want to know what other currency pairs the DailyFX team is watching? Download and review the Top Trading Opportunities for 2019

--- Written by David Song, Currency Strategist

Follow me on Twitter at @DavidJSong.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.