GBP/USD falls below key support on BOE decision and US economic data

By: Crispus Nyaga
Crispus Nyaga
Crispus is an active trader, where he is followed and copied at Capital.com. He lives in Nairobi with his… read more.
on Jun 18, 2020
  • The GBP/USD pair dropped to the lowest level this month after the BOE delivered its interest rate decision.
  • The bank left interest rate unchanged and added £100 billion into its quantitative easing program.
  • In the United States, data from Philadelphia Fed showed that manufacturing activity rebounded in May.

The GBP/USD pair declined by almost 1% after the Bank of England (BoE) delivered its interest rate decision. The pair is trading at 1.2562, which is substantially lower than this week’s high of 1.2688. The pound index, which measures the sterling’s performance against peers, declined by 75 basis points also.

GBPUSD
GBP/USD falls after BOE and US manufacturing data

UK economy struggling

The UK has been among the worst-affected countries in Europe. According to Worldometer, the country has more than 299,251 infections and more than 42,000 deaths. On infections, the country is number five after the US, Brazil, Russia, and India. On deaths, it is the third after the US and Brazil.

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The country’s economy is also among the worst affected. In a statement earlier this month, the OECD – a club of rich countries – said that the UK will be the worst-affected economies in the G7 this year. It expects the economy to contract by 11.5% this year.

Companies are also struggling. Last week, Centrica announced that it would slash more than 5,000 jobs this year. Johnson Matthey, the industrial giant, said that it would slash 2,500 jobs. Similarly, with global travel struggling, Heathrow started a redundancy program targeting about 7,000 jobs.

At the same time, economic numbers from the UK are dire. Just yesterday, data by the Office of National Statistics (ONS) showed that inflation had fallen to the lowest level since 2016. This decline was mostly due to a 16.7% decline in fuel prices and recreation and culture.

Bank of England decision

The GBP/USD pair fell sharply after the BoE delivered its interest rate decision today. As was widely expected, the bank decided to leave interest rates unchanged at 0.10%.

It also decided to increase its quantitative easing program by £100 billion. This brings the total authorisation of the funding to £745 billion. Most importantly, it announced that the purchases of gilts will be done at a slower pace going forward.

Another important part is that the bank decided to avoid negative rates all together. The monetary policy statement did not even mention about it. The bank said:

“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, measures taken to protect public health, and how governments, households and businesses respond to these factors.”

In a report after the decision, analysts at ING said:

“Still, the myriad of risks facing the economy suggests that the Bank could come under further pressure to do more – and that will undoubtedly fuel discussion of negative rates.”

The BOE was not the only central bank to deliver its decision today. The SNB left rates unchanged in Switzerland while the Norges Bank sounded upbeat in its decision today. The Indonesian central bank slashed rates for the third time this year.

US manufacturing rebounds

The GBP/USD pair also reacted to data from the United States. According to the Bureau of Labour Statistics (BLS), more than 1.50 million Americans filed for unemployment insurance in the previous week. This number was better than last week’s number of 1.56 million. It is also the lowest number released since March this year. The lagging continuing claims number fell from the previous 20.6 million to 20.5 million.

Meanwhile, the manufacturing industry in the United States is rebounding. That is according to the latest data by the Philadelphia central bank.

The data showed that the manufacturing index increased to 27.5 in May, after cratering to minus 43.1 in May. All indices of the index showed improvement. The CAPEX index rose from 15.20 to 26.30 while the employment index improved from -15.3 to -4.3. At the same time, the new orders index improved from -25.7 to 16.7 while the prices paid increased to 11.10.

GBP/USD technical outlook

On the daily chart, the GBP/USD dropped to the lowest level since June 1st. The price also passed the important milestone of 50% Fibonacci retracement level. It is also below the 50-day and 100-day exponential moving average. The Relative Strength Index (RSI) has moved to the oversold level. The pair will likely continue falling as bears attempt to move below 1.2300.

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