GBP/USD Tests Ultimate Support After BOE, FED Keep Rates on Hold

The strong surge in GBP/USD ended by the middle of November, but it has continued to enjoy bullish momentum, making higher lows, with the 200 SMA (purple) on the daily chart acting as support. However, this moving average is under attack from sellers now, following the strong US NFP report on Friday, but it held during the 150 pip crash, so let’s see if it will continue to do so last week.

The UK economy continues to be quite vulnerable, however, it has avoided a technical recession thus far, beating expectations, while inflation wasn’t retreating until recently, unlike in other regions where it started declining in early 2023. This kept the Bank of England on the hawkish side until recently as well. But the economy is still suffering, with GDP flatlining in the third quarter of 2023, and many analysts foresee a recession. So, expectations were mixed as we were heading to the Bank of England meeting.

Last week the Bank of England opted to keep interest rates constant at 5.25% for the fifth time. However, the MPC voting result was not unanimous with 3 votes for further hikes as we saw in the previous meeting, as two BoE officials (Catherine Mann and Jonathan Haskel) opted to raise interest rates by 25 basis points (bps) to 5.50%.

Six of the nine members of the Monetary Policy Committee (MPC) backed keeping the status quo, while Swati Dhingra supported a rate drop of 0.25% to 5.00%. Bank of England Governor Andrew Bailey stressed the need to maintain higher interest rates until they are sure that inflation falls to 2%. The economic numbers will determine how long these levels of interest rates will last.

The BOE rates remained unchanged and they try to not give out too much as usual, however, there were indications that the tide has turned from hawkish to dovish. The votes indicate that the BOE is shifting to dovish slowly. This is shown by two MPC members dialing a step lower, one going from a 25 bps hike to neutral, while the other went from neutral to dovish. Besides that, the message was more dovish than prior ones as well, emphasizing that “the risks to inflation are more balanced.”

GBP/USD Returns to the 200 Daily SMA

The price has traded sideways in January

So, the tightening cycle has concluded and there’s no reason for the GBP to remain bullish, but they might remain more “neutral” than other major central banks, in this case, the FED and hold rates at these levels for longer. it’s for that reason that GBP/USD jumped 120 pips higher on Thursday, however, that was helped to a large degree by fears of US regional bank problems returning again.

On Friday, the situation reversed totally after the strong NFP jobs report which sent the price back to the 200 SMA (purple). This moving average which now stands just above 1.26, has been acting as support for a few months and the decline stopped there again on Friday. But, with such great economic numbers form the US we might see a break to the downside this time, which would open the door for 1.25. We will follow the price action today and might open a sell GBPUSD signal on a break below 1.26.