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British Pound Forecast: BoE Talks End Game, EUR/GBP Drops to Yearly Lows

British Pound Forecast: BoE Talks End Game, EUR/GBP Drops to Yearly Lows

Justin McQueen, Strategist

GBP/USDFUNDAMENTAL HIGHLIGHTS:

  • BoE Announces Sequence for Exit
  • EUR/GBP Edges Towards YTD Low

BoE Recap: The most noteworthy takeaway from the BoE meeting had been the update to its exit sequencing, where the BoE lowered the Bank Rate threshold to unwind its balance sheet to 0.5% from 1.5%. What’s more, with the BoE acknowledging that should the economy grow as expected, modest tightening is likely to be needed, market participants have brought forward expectations on the timing of rate hikes with short sterling futures signalling the Bank Rate at 0.5% by Dec 2022.

The view to normalising policy is in stark contrast to the ECB and thus, the Pound can retain upside against the Euro. In turn, with EUR/GBP breaking below the psychological 0.8500 handle, the cross is pressing on the YTD low at 0.8470, while any bounce will likely be sold into. Unlike the back end of Q1, EUR/GBP is not currently oversold on the break below 0.8500 as was the case previously. However, it will be important to assess the cross on a retest at 0.8500, failure to hold could see weak shorts on an 0.8500 breach squeeze, prompting a reprieve in EUR/GBP, whereas 0.8500 capping upside can add credence to the downside break.

EUR/GBP Chart: Daily Time Frame

British Pound Forecast: BoE Talks End Game, EUR/GBP Drops to Yearly Lows

Source: Refinitiv

GBP/USD: A strong NFP report has led to pair closing the week roughly where it began and once again back below 1.3900. In light of the NFP report, this makes the Jackson Hole Symposium a live meeting to signal the details of an eventual QE taper. This would be somewhat fitting as it would mark the first anniversary of the average inflation targeting announcement. That said, with US yields establishing a short term bottom, the USD could retain a bid heading into JH and thus cap upside in Cable. On the downside, support sits at 1.3870 and 1.3850, while on the topside the 1.4000 area is the key pivot for bulls.

GBP/USD Chart: Daily Time Frame

British Pound Forecast: BoE Talks End Game, EUR/GBP Drops to Yearly Lows

Source: Refinitiv

What to Watch Next Week

Heading into next week, the calendar is relatively light from the UK standpoint, with only the UK Q2 GDP report to be released. The quarterly reading is expected at 4.8%, meaning GDP would be less than 3% away from hitting pre-Covid levels. That said, I don’t expect this data to be a notable mover for the currency, given that this will unlikely alter the BoE’s thinking going forward. Reminder, the BoE continue to project GDP at 7.25% for 2021. Therefore, the USD side of the equation may be the bigger determinant with US CPI the main highlight on the economic calendar next week.

Economic Calendar

British Pound Forecast: BoE Talks End Game, EUR/GBP Drops to Yearly Lows

Source: Refinitiv

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