Preview of BoE Decision and Statement: GBPUSD At Crossroads
The Monetary Policy Committee of the Bank of England (BoE) will release its interest rate decision, and statement on Thursday, July 18, 2020, at 11 am GMT. Also scheduled for release will be the voting patterns for both the Official Bank Rate and the Asset Purchase Facility. Every single one of these indices is capable of affecting the GBPUSD pair. As at the time of writing this preview on June 12, the UK economy is struggling, and the cable finds itself pressured on several fronts.
Apart from the headwinds being brought on by the Brexit talks which have not gone in the UK’s favour so far, today’s GDP data shows that the UK economy contracted by 20.4% month-over-month, which was worse than the expected figure of – 18.6 and also worse than the last number that registered at -5.8%.
The UK GDP’s -20.4% drop brings the total decline in GDP since February 2020 to -25.1%, making it the worst contraction the UK economy has faced in recent memory. Indices for services, production, manufacturing and agriculture registered at -24.0%, -23.7%. -27.8% and -5.6%. Construction had been the worst hit, dropping 43.6% from February to April 2020.
The gradual but steady depreciation in the economic indicators for the UK prompted a selloff in the first half of May 2020, as analysts increased bets on the BoE sending the Official Bank Rate into negative territory. However, the bearish sentiment in the US Dollar over the last three weeks dampened the pre-existing bearish view on the GBPUSD and allowed the pair to recover, gaining for three weeks in a row before this week’s 1.15% slump.
Markets are betting on an expansion of the Asset Purchase Facility from 645 billion pounds to 745 billion pounds with a voting pattern of 0-9-0. Bets are also on the BoE leaving rates unchanged at 0.1%, with a 0-0-9 vote pattern.
If the BoE delivers on figures that are deemed dovish, the GBPUSD could be sold hard, targeting 1.22708, 1.22006 or even 1.20005 in the near-term. Headlines which are unfavourable to the UK in the Brexit talks (such as the UK declaring it will not extend the December 31, 2020 deadline) could allow the selloff to continue below the 1.20005 psychological support target.
On the flip side, progress from the Brexit talks as well as a hawkish outcome from the BoE meeting could allow the GBPUSD to reverse to the upside. A bounce from the 1.24267 price area preserves the recent higher lows, which may allow for a short term recovery towards 1.27558. However, further upside towards targets above 1.28280 will depend on a breakout above 1.27558. This breakout produces a higher high that signals uptrend continuation.