The British currency in relation to the US dollar today was at some time the cheapest since January 2017. The GBP/USD fell temporarily below 1.2100, then turn back while awaiting the decision of the Bank of England, which was published at 13:00. Then the GBP decline deepened.
In line with market expectations, the Monetary Policy Committee (MPC) has not changed interest rates. It was a unanimous decision. The main interest rate in the United Kingdom remained at 0.75 percent, but the statement indicated that assuming calm brexit and some improvement in the global economy, the Bank of England may gradually increase interest rates. Nevertheless, the central bank decided to lower its forecasts for 2019 and 2020 due to slower export growth and weak corporate investments. BoE's forecasts assume that the United Kingdom will avoid the brexit-related shock, but still expect an increase of 1.3 percent in 2019 and 2020. Previously it was 1.5 and 1.6 percent.
Mark Carney, who is the Governor of the Bank of England, added that the impact of tensions in global trade is greater than previously thought. Meanwhile, BoE's answer to brexit may be in both directions, but it can not say whether the central bank will increase the stimulus program for the economy if it comes to hard brexit. The monetary policy response to brexit will not be automatic. The Committee's response will be adequate to achieve the inflation target of 2 percent all the time. – the Governor of BoE added.
However, the market does not believe in the current main scenario of the Bank of England, as investors give as much as 60 percent odds that interest rate in the United Kingdom may be reduced in five months. This results in a large divergence between the BoE statement and the interest rate market. If brexit would end successfully for the Britain, then the pound would have some room to strengthen, and the chances for a rate cut could significantly decrease.
GBP/USD, W1. Source: Conotoxia trading platform.
Looking at the chart, the GBP/USD rate is approaching key support, which was set at a round level of 1.2000. This area was defended in October 2016 and January 2017 and the market turned there twice. It is worth to observe this level.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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