- BoE offered dovish guidance but projected that inflation may run hot again in Q1 2025.
- GBP has remained the top outperformer major currency against the US dollar.
- Technical analysis suggests a potential bullish breakout for GBP/USD.
The British pound sterling (GBP) made another remarkable intraday recovery yesterday after the Bank of England (BoE) maintained its policy Bank Rate at a 16-high of 5.24% for the fourth consecutive time as expected and toned down its prior hawkish rhetoric.
Interestingly for the first time since 2008, the Monetary Policy Committee members of BoE have voted for both rate cuts and hikes at the same meeting; 2 members voted for a hike (down from 3 in the prior meeting), 1 member voted for a cut (0 members voted for cut in the prior meeting), and six members voted for no change in rate.
A slightly dovish tilt from BoE but issued a lukewarm inflation forecast
Fig 1: BoE inflation forecasts as of 2 Feb 2024 (Source: Bloomberg News, click to enlarge chart)
In addition, BoE Governor Bailey commented that inflation was moving in the right direction, interest rates would be kept “under review”, and dropped a previous warning that the Bank Rate could increase further due to the risk of inflationary pressure resurging.
Overall, the BoE has issued dovish guidance on its monetary policy, a first move away from its prior “staunch” hawkish view that inflationary pressures remain elevated, in line with the Fed and ECB but to a lesser degree.
BoE has also released its latest UK inflationary forecasts where it projected that headline CPI inflation is likely to decelerate at a faster pace in the first half of 2023 versus its prior forecast made in November 2023, and it expects inflation to dip towards BoE’s target of 2% in Q2 2024.
But thereafter, the headline inflationary pressure is likely to revive and increase to 2.8% y/y in Q1 2025 and only starts to taper off in Q3 2025, as well as staying above the 2% target till Q3 2026 (see Fig 1).
GBP remains the strongest currency among the majors
Fig 2: 1-month rolling performances of major currencies against US dollar as of 2 Feb 2024 (Source: TradingView, click to enlarge chart)
Hence in the mindsets of BoE officials, there is still a “lingering fear” of the resurgence of inflationary pressure that suggests a tinker of hawkish vibes which in turn may trigger a lag in BoE’s anticipated interest cut versus a more relatively dovish modus operandi from the Fed and ECB; market participants have priced in four interest rate cuts from BoE, below six cuts expected from Fed and ECB respectively in 2024.
Given such a hint of “residual” hawkish vibes derived from BoE’s latest inflation projections, the GBP has remained the top outperformer among the major currencies against the USD dollar where it has recorded a gain of +0.16% versus the US dollar according to one-month rolling performance calculations (see Fig 2)
Positive momentum condition flashed out for GBP/USD after compression for 5 weeks
Fig 3: GBP/USD medium-term trend as of 2 Feb 2024 (Source: TradingView, click to enlarge chart)
Fig 4: GBP/USD short-term trend as of 2 Feb 2024 (Source: TradingView, click to enlarge chart)
Through the lens of technical analysis, positive elements have surfaced in the price actions of GBP/USD. It has consolidated in a “Symmetrical Triangle” range configuration in place since 28 December 2023; a consolidation or “resting moment” to retrace the impulsive upmove sequence of its recent medium-term uptrend phase from 4 October 2023 low of 1.2037 to 28 December 2023 high of 1.2828.
So far, it has traded above its upward-sloping 50-day moving average since 14 November 2023 and yesterday’s (1 February) price action (a daily gain of +0.44%) has formed a bullish candlestick body that has managed to engulf the prior consecutive small candlestick bodies in place since 18 January 2024 (see Fig 3).
In addition, the daily RSI momentum indicator has just staged a bullish breakout above its prior parallel descending resistance at the 55 level. This observation suggests a potential leading bullish signal for a possible imminent bullish price action breakout.
The rising 2-year UK Gilt-US Treasury sovereign bond spread is also advocating a potential bullish momentum resurgence for GBP/USD.
Watch the 1.2610 key short-term pivotal support and clearance above 1.2760 (upper boundary of the “Symmetrical Triangle” range) sees the next intermediate resistances coming in at 1.2820 and 1.2880 in the first step.
On the other hand, a break below 1.2610 invalidates the bullish tone for another leg of minor corrective decline to expose the next intermediate support zone at 1.2550/2500 (also the 200-day moving average).