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British Pound Outlook: GBP/USD Clears May Low Ahead of BoE

British Pound Outlook: GBP/USD Clears May Low Ahead of BoE

David Song, Strategist

British Pound Talking Points

GBP/USD clears the May low (1.3801) as the Federal Reserve forecasts two rate hikes for 2023, and the Bank of England (BoE) interest rate decision may do little to sway the exchange rate as the central bank is widely expected to retain the current course for monetary policy.

Fundamental Forecast for British Pound: Bearish

GBP/USD trades to a fresh monthly low (1.3795) as Fed officials offer a less dovish forward guidance for monetary policy, and more of the same from the BoE may produce headwinds for the British Pound as the central bank appears to be in no rush to switch gears.

Following the operational decision to adjust its weekly asset purchases, it seems as though the BoE will retain the current course for monetary policy as the “Committee does not intend to tighten monetary policy at least until there is clear evidence that significant progress is being made in eliminating spare capacity and achieving the 2% inflation target sustainably.”

As a result, the Monetary Policy Committee (MPC) may stick to the same script on June 24 as the BoE is slated to update the quarterly Monetary Policy Report (MPR) in August, and Governor Andrew Bailey and Co. may merely attempt to buy time as “most members of the Committee judged that the existing stance of monetary policy, which included the previously announced £150 billion increase in the target stock of purchased assets, remained appropriate.”

In turn, the meeting minutes may continue to show an 8-1 split to keep the Asset Purchase Facility (AFP) at GBP 895B, with the dissenting vote pushing for a reduction in “the scale of asset purchases in the current programme from £150 billion to £100 billion,” but indication of a growing dissent within the MPC may generate a bullish reaction in the British Pound as it fuels speculation for a looming shift in BoE policy.

With that said, GBP/USD remains vulnerable after taking out the May low (1.3801) as the BoE is expected to retain the current course for monetary policy, and more of the same from Governor Bailey and Co. may do little to shore up the British Pound unless an increasing number of MPC officials show a greater willingness to taper the APF.

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--- 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.

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