GBP/USD forecast: BOE interest rate decision preview

The GBP/USD pair is loitering near its lowest level since December 2020 as the Omicron variant changes the Bank of England’s (BOE) calculus on policy. The pair is trading at 1.3212, which is about 7% below its highest level this year.

BOE interest rate preview

The UK economy is doing relatively well as many businesses and international travel reopens. Recent economic numbers support this view. 

For example, on Tuesday, data by the Office of National Statistics (ONS) showed that the country’s unemployment rate declined to 4.2% in October. The economy also added the highest number of jobs since 2014. 

And on Wednesday, the GBP/USD reacted mildly after the ONS published strong UK inflation numbers. The data revealed that the country’s headline consumer price index (CPI) rose from 4.2% in October to 5.2% in November. This increase caught many analysts by surprise since most of them were expecting the figure to rise to about 4.7%.

Excluding energy and food prices, inflation rose from 3.4% to 4.0%. This was also bigger than the median estimate of 3.7%. Other inflation indicators like the retail price index (RPI) and producer price index (PPI) also surged.

Therefore, focus now shifts to the Bank of England that started its final meeting of the year on Wednesday. To a large extent, a case for tightening monetary conditions can be made since inflation has surged while the unemployment rate has dropped. Also, the Omicron variant is estimated to have a modest impact on the economy.

However, most analysts expect that the BOE will embrace a cautious view when it concludes its meeting on Thursday. They believe that the bank will leave rates and quantitative easing (QE) unchanged and say that it is prepared to adjust them.

GBP/USD forecast

The daily chart shows that the GBP/USD pair has been in a deep sell-off in the past few weeks. Along the way, the pair has managed to move to the 38.2% Fibonacci retracement levels. It has also managed to move below the 25-day moving average and is along the lower side of the Bollinger Bands. Oscillators like the Relative Strength Index (RSI) and the Stochastic oscillator have also declined sharply. Therefore, the path of the least resistance for the pair is lower with the next key level to watch being at 1.3100.