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GBP Price Outlook: GBP/USD Downside Beckons Despite Likely UK Rate Hike

GBP Price Outlook: GBP/USD Downside Beckons Despite Likely UK Rate Hike

Martin Essex, MSTA,
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GBP price, news and analysis:

  • The Bank of England’s monetary policy committee is almost certain to raise UK Bank Rate to 0.25% today from the current 0.10%.
  • However, that 15bps increase has been fully priced in by the markets already and GBP/USD is therefore more likely to weaken than strengthen in response.

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Risk to the downside for GBP/USD

GBP/USD is looking fragile around current levels, with a 15 basis point rate increase to 0.25% by the Bank of England’s monetary policy committee today still fully priced in by the markets. This suggests that the chances of a hawkish surprise by the BoE are very limited, with the markets having also priced in further increases in UK Bank Rate to 1.00% by August next year.

As I wrote here Tuesday, economists are not as sure as the markets that UK rates will rise. In polls by the Reuters and Bloomberg news agencies, analysts asked for their opinions were roughly split equally between those expecting a rate rise and those predicting no change. It is also not clear whether voters on the MPC will be unanimous in their verdict, which seems unlikely.

Still, the only real hope for the GBP bulls is that the Bank’s Inflation Report highlights the risk of higher inflation despite the tightening of monetary policy currently expected by the markets.

GBP/USD Price Chart, One-Hour Timeframe (October 11 – November 4, 2021)

Latest GBP/USD price chart.

Source: IG (You can click on it for a larger image)

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Bank of England could push back

By contrast, if the Bank suggests that the markets have become too aggressive on pricing, that would likely weaken GBP/USD and so, of course, would an unexpected decision not to tighten rates today after all.

From a technical perspective, the first downside levels to watch out for are the 1.3606 lows touched on Tuesday. However, if they break, there is little further support ahead of the 1.3569 lows reached back on October 12. To the upside, round number resistance at 1.37 and then 1.38 would likely be hard to top.

Sentiment data mixed

Turning to the IG client positioning numbers, there is no clear signal currently. The retail trader data show 54.68% of traders are net-long, with the ratio of traders long to short at 1.21 to 1. The number of traders net-long is 16.52% lower than yesterday and 8.17% higher than last week, while the number of traders net-short is 6.44% higher than yesterday and 15.53% lower from last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD prices may fall.Positioning is less net-long than yesterday but more net-long than last week. The combination of current sentiment and recent changes gives us a mixed GBP/USD trading bias.

-- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex

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