As the dust settled following the latest Bank of England rate meeting, the GBPUSD had slid to 1.2079 and below the psychological level of 1.21. However, GBPUSD had not changed too much from Tuesday’s low when the price reached a low of 1.2113, following a few days of aggressive selling on the back of Brexit fears.
The theme of Brexit also dominated the Bank of England rate meeting, as the central bank acknowledges the strong labor market and decent wage growth, but implied that the risks around Brexit tie its hands.
My view on the Bank of England is that they would like to keep their powder dry for as long as possible and if the economy is in a free-fall at the time of Brexit, they will be able to lower rates and introduce QE to support the economy.
Unfortunately, this means that they will not do anything to stop the fall in the British Pound despite it will probably cause inflation to reach above its two percent target. Raising interest rates today could have supported the GBP, but if we ignore Brexit for a while despite the unemployment rate being at decades low, the rest of the economy is not doing very well. Annual GDP is growing at a respectable pace of 1.8%, and inflation is now at the 2% target, with core inflation at 1.8%. Also, the UK housing market and business investments are struggling, and a rate rise would probably outweigh the damage of inflation.
As for GBPUSD, the price trend will remain bearish as I have suggested for weeks, but I don’t think traders are interested in short-selling the pair at the current level of 1.2107 as the risk-reward ratio is bad. Instead, I think traders will be excited in rebuilding their bearish exposure in the 1.23 to 1.24 interval to obtain a better risk-reward. The 1.23 level is the 50% correction level of the latest slide from the July 24 high of 1.2523 to the current year-to-date low at 1.2079. In the interval above, we also find the July 17 low at 1.2379 and, I think it will act as a healthy resistance level. I will treat the trend as downwards as long as the price trades below the 1.2450 level, and think the price will remain under pressure until a deal between the EU and UK is within grasp. The next support level and potential target of bearish traders is the 1.1947 level, and it is derived by treating the break below the February 2019 low of 1.2780 in May as the triggering of a “failed inverse head and shoulders pattern.”Don’t miss a beat! Follow us on Twitter.