GBP/USD: Key levels to watch ahead of the BOE interest rate decision

on May 5, 2021
  • The GBP/USD is in a tight range as the market waits for the BOE rate decision.
  • Analysts expect that the bank will leave interest rates and QE unchanged.
  • A hawkish BOE will be positive for the British pound.

The GBP/USD is struggling to find direction as forex traders start focusing on the upcoming Bank of England (BOE) interest rate decision. It is trading at 1.3920, which is 0.85% above Friday’s low of 1.3800.

GBP/USD
GBP/USD chart

Bank of England preview

The BOE started its two-day monetary policy meeting on Wednesday. It will then publish the outcome of the deliberations on Thursday afternoon. 

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This decision comes at an important time for the UK economy. There are signs that the economy is recovering faster than expected. The labour market is also getting tight as more businesses reopen. The latest data showed that the unemployment rate declined to 4.9% in February this year. Since many companies have started to reopen, there is a possibility that the situation has improved.

Sectors like manufacturing, services, and retail have also rebounded. At the same time, public debt has surged to the highest level since the second world war. Most of this debt is held by the Bank of England itself. 

Economists polled by Reuters expect that the BOE will leave interest rates unchanged at 0.10%. This is in line with what other central banks like the Federal Reserve, European Central Bank (ECB), and Fed have done lately. 

Analysts at top banks and CFD brokers will be focusing on the bank’s 875 billion pound quantitative easing program. Some analysts expect that the BOE will decide to wait and see while others expect it to hint at possible tapering of the purchases. The bank will also likely boost its economic outlook for the UK economy, which will be bullish for the GBP/USD pair. In a note, analysts at Barclays said:

“But, how much more can it upgrade without effectively preparing markets for early hikes? We think the MPC will continue to tread carefully, balancing an optimistic narrative with historically high uncertainties.”

On the other hand, those at ING Bank wrote:

“The Bank of England is likely to shrink its government bond holdings alongside future rate hikes. That might involve reducing reinvestments of maturing bonds to shrink the balance sheet by £30-40bn/year.”

GBP/USD forecast

GBP/USD
GBP/USD technical chart

The four-hour chart shows that the GBP/USD is wavering ahead of the BOE rate decision. The price is at the same level as the 25-day and 15-day exponential moving averages (EMA). It has also formed a descending channel pattern that is shown in green. Therefore, in case of a hawkish BOE, the pair could jump to the resistance at 1.400. However, if the bank publishes a dovish statement, there is a possibility that it will drop to 1.3800.

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