GBP/USD Declines Sharply, Cautious Bank Of England Holds Interest Rates At 0.25%

Markets look to have over-reacted slightly to Thursday’s Bank of England statement, although sentiment will remain generally weaker in the short term with GBP/USD corrections likely to be capped near 1.3160.

GBP/USD traded in relatively narrow ranges during US trading on Wednesday despite choppy trading across the major pairs.

Wider US losses pushed GBP/USD to fresh 10-month highs at 1.3250 before a retreat to the 1.3220 area as the dollar staged a limited recovery.

There was underlying caution ahead of the Bank of England policy meeting, especially with mixed comments from former officials. Previous Chief Economist Bean warned over the risks of a sharp downturn in consumer spending while former Deputy Governor Gieve stated that the central bank should reverse the emergency rate cut sanctioned in 2016.

The UK PMI services-sector index strengthened to 53.8 for July from 53.4 and was slightly above consensus expectations, although underlying business confidence was still fragile.

Sterling gained some degree of support from the data with GBP/USD testing resistance above the 1.3250 level.

The UK currency consolidated with a firm tone ahead of the Bank of England policy decision with some outside speculation that interest rates could be increased.

In the event, interest rates were left on hold at 0.25% and there was a 6-2 vote for the decision with Saunders and McCafferty voting for an increase in rates. Both the decision and vote split were in line with consensus forecasts.

There was, however, a slight downgrading to GDP growth forecasts with inflation projections little changed.

Although the bank repeated that interest rates could be increased by more than implied by the market yield curve, there were no hints of a short-term move to raise rates and the overall bank tone appeared slightly more cautious.

Sterling fell sharply following the decision with GBP/USD immediately dipping to lows near 1.3160 even with the dollar unable to make any wider headway.

Bank Governor Carney adopted a broadly neutral stance and his rhetoric overall failed to shift the market perception of a more cautious tone, especially with comments that Brexit contingency plans were being discussed.

Overall, GBP/USD retreated to lows around 1.3115 early in US trading as Sterling remained under pressure with EUR/GBP trading at 8-month highs above 0.9000.

The next major move will be determined by Friday’s US employment report, although the underlying Sterling confidence is liable to remain fragile.

GBP/USD 4-Hour Chart

gbpusd03-08-17

Tim is a contributing author to EconomicCalendar.com. He is an economist and has been involved in financial markets for over 20 years as an analyst. He specialises in global economic trends, macro policy and central banks. Extensive knowledge, experience and data mining is used to anticipate trends in equities, bonds and forex with a contrarian slant. He is a graduate of the University of York with a degree in Economics/Econometrics.