Rare BoE Vote Split Will Continue to Provide Support

GBP/USD Forecast: Neutral

• GBP/USD posted modest gains last week
• Both the Bank of England and Federal Reserve pushed back on rate-cut hopes
• The coming week’s scheduled data won’t change much there

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The British Pound was boosted last week by the widest split for sixteen years. on the Bank of England’s interest-rate-setting committee.

The key bank rate was held at 5.25%, as more or less everyone had expected on February 1. However, there was a three-way split on the Monetary Policy Committee for the first time since 2016. Six members wanted to leave rates alone, two wanted to increase them again and one wanted a cut.

For the markets’ part, investors still seem pretty sure that the next move, when it comes, will be a reduction. But it’s clear that the central bank is in no hurry there, and that current settings could well endure into the second half of 2024.

Sterling might well have garnered more support against the United States Dollar than it did from this prospect. However last week also saw the Federal Reserve evince its own reluctance to slash borrowing costs early. This saw the Dollar gain as market forecasts for a rate cut Stateside were also pushed back.

So that’s where we are on both sides of GBP/USD. Interest rates are at multi-decade highs, and markets are still reasonably certain that when they move they’ll fall, but the timing of that fall is still dependent on the data.

The coming week will bring neither major central bank action or much in the way of first-tier data. Given that it’s hard to see any break in Sterling’s broad trading range against the Dollar, in place since mid-December.

Sadly these days it’s necessary to keep an eye on Gaza, the Red Sea, and Ukraine. Any risk aversion they generate could favor the Dollar rather than Sterling. However, geopolitical risk events are unpredictable. Based on what we know, it must be another neutral call for Sterling this week.

GBP/USD Technical Analysis

GBP/USD Daily Chart Created Using TradingView

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The trading range between December 28’s four-month peak of 1.28288 and the intraday lows of January 3 and 17 at 1.26007 remains dominant. Just above the lower bound comes support at the first Fibonacci retracement of the rise from October’s lows to last December’s highs. That comes in at 1.26316. Above that the psychological prop of 1.27 is also important, with sterling showing a tendency to oscillate around that mark which bears watching.

The 50-day moving average could also be an important short-term indicator, particularly concerning Sterling’s ability to remain above it. It has come uncomfortably close to the market of late and now offers support at 1.26726. Any daily close below that could presage deeper falls and possibly a downside range break.

Sterling bulls will need to top the last significant high of 1.27644 if they’re going to attack the range top convincingly. That was the intraday peak of December 27.

GBP has spent the last four months at what are by the standards of the past year quite elevated levels against the Dollar. Much of this is no doubt explained away by the markets’ fundamental interest rate views, and the idea that the US is more advanced in its inflation fight than the UK. While that view sticks, GBP/USD seems likely to hold up.

–By David Cottle For DailyFX