British Pound (GBP) Price Outlook: Bank of England Decision Too Close to Call

GBP price, news and analysis:

• The Bank of England announces its decision on UK monetary policy at 1200 UK time this session.
• Lacking any clear guidance from the central bank, the markets are split on whether it will leave Bank Rate on hold at 0.1% or increase it to 0.25%.
• That makes the next move in GBP/USD hard to predict but judging by the reaction in EUR/USD to a hawkish Federal Reserve, even a UK rate rise could prompt a move lower in GBP/USD.

GBP/USD waiting for Bank of England decision

GBP/USD is stable in early London trade Thursday ahead of the announcement at noon on whether the Bank of England’s monetary policy committee has decided to keep UK Bank Rate at 0.1% or increase it to 0.25%. That makes the following move in GBP/USD particularly hard to predict.

The dilemma faced by the MPC is whether a tightening of policy is needed after news that UK inflation jumped in November to a decade-high 5.1%, more than twice the 2% target, or whether it should leave rates on hold because of fears about weak economic growth due to the rapid spread of the Omicron coronavirus variant.

So far, there has been little guidance from the central bank to the markets after it surprised them by leaving rates unchanged at its last meeting.

Traditionally, GBP/USD would be expected to strengthen on a hawkish BoE but the drop in USD Wednesday after the hawkish tilt by the Federal Reserve suggests that even a UK rate increase might not prompt a rise in the pair and other GBP crosses. Note too that the relative strength index on the five-minute chart below shows that Cable is in overbought territory, with the RSI above 70.

GBP/USD Price Chart, Five-Minute Timeframe (December 15-16, 2021)

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

North Shropshire by-election

Adding to the mix, a by-election in North Shropshire to vote on a new Member of Parliament for the area takes place Thursday, with the result due early Friday. Normally, this would have no impact on the markets but the by-election is being seen as a referendum on Prime Minister Boris Johnson’s leadership so if his Conservative Party loses the seat it could have an effect on Sterling assets.

Retail trader data neutral GBP/USD

Turning to the IG client positioning numbers, retail trader data show 72.99% of traders are net-long GBP/USD, with the ratio of traders long to short at 2.70 to 1. The number of traders net-long is 2.83% lower than yesterday and 5.93% lower than last week, while the number of traders net-short is 4.06% lower than yesterday but 9.39% higher than last week.

Here at DailyFX, we typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests GBP/USD may fall.Positioning is more net-long than yesterday but less net-long than last week, and the combination of current sentiment and recent changes gives us no clear GBP/USD trading bias.

-- Written by Martin Essex, Analyst

Feel free to contact me on Twitter @MartinSEssex