GBP/USD spikes after the BOE interest rate decision; US jobs data eyed

The GBP/USD pair roseafter the Bank of England (BOE) delivered its interest rate decision. The market is also reacting to a slew of weak economic data from the UK.

BOE interest rate decision

The BOE became the fifth major central bank to release its interest rate decision after the BOJ, Fed, ECB, and RBA. As with the previous banks, the BOE decided to leave rates at the record low of 0.1% as most analysts polled by Reuters were expecting.

The bank also decided to make nochanges to its £200 billion quantitative easing program that started in March. According to Barrons, most analysts did not see a need for the bank to add to the purchases because the current program has a long way to go. The bank is acquiring about £13.5 billion gilts a week, which means that the current program could run at least through July. Two members of the committee preferred another £100 billion increase to the purchases.

In a statement, Governor Andrew Bailey lamented that the UK economy had gotten worse because of the current lockdown. His committee now thinks that household consumption will declineby about 30% this year. He also expects sales to drop by 40%and inflation to remain below the target of 2.0%. The statement added:

“The unprecedented situation means that the outlook for the UK and global economies is unusually uncertain.  It will depend critically on the evolution of the pandemic, and how governments, households and businesses respond to it.”

In recent weeks, other central banks have put in place extraordinary measures to support the economy. The Bank of Japan and the European Central Bank have initiated negative interest rates and launched an open-ended quantitative easing. These central banks have also widened the net of their asset purchases to include risky assets like junk bonds.

GBP/USD reacts to a slew of weak economic data

The BOE interest rate decision came at a time when the economic data from the UK has been disappointing. According to KPMG, demand for workers in the country contracted at the fastest pace in 22 years in April. This was mostly because most people stayed at home in April as they complied with the government lockdown measures.

The construction sector weakened significantly in April, according to Markit. The construction PMI tumbled to a record low of 8.2 in April from the previous 39.3. Subsequently, this sent a warning that thousands of jobs in the sector were at risk.

The services sector has also declined to record lows. Data released earlier this week showed that the PMIs dropped to a record 13.4. The services sector has been decimated because most companies like hotels, tour and travel, and restaurants have not been operating. Worse, most companies polled by the Institute of Directors (IoD) said that it would take them more than a month to return to pre-lockdown levels even if the restrictions were lifted.

According to Reuters, most analysts expect the UK economy to contract by about 13% in the three months to June. This will be the worst quarterly contraction in decades.

Brexit challenges mount

Even as the BOE made its interest rate decision, analysts are concerned about Brexit. Talks have been going on slowly and the time is running out for the UK. According to the transition documents, the country has until June 30^th to ask for an extension from the EU. In previous statements, Boris Johnson has ruled out seeking an extension.

The main challenge is that it is almost impossible to negotiate a wide-reaching trade deal in less than a year. Worse, the two sides are trying to accomplish the impossible by holding the negotiations through video link.

The two sides have several differences. For example, the UK wants several small deals while the EU has insisted on a single large trade deal. Another difference is that the UK has ruled out working under EU rules and regulations. On its part, the EU has said that if the UK creates its own rules, its companies will be at an added unfair advantage.

The weak economic data, coupled with Brexit problems, have led to many investors to increase their short bets on the British pound (GBP/USD).

GBP/USD technical outlook

On the four-hour chart, the GBP/USD pair rose after the BOE interest rate decision. It moved to a high of 1.2380, which is between the 50% and 38.2% Fibonacci retracement level. The price is still below the Ichimoku cloud and is still between the channel that was started in March. At this point, this consolidation may happen as the market continues to wait for more Brexit-related data.