Sterling extends losses after BoE decision

• The British Pound shows red bars on traders’ screens after the Bank of England meeting.
• The bank leaves interest rates unchanged and maintains the same 7-2 voting split.
• The language of the statement and accompanying minutes leans marginally dovish, weighing on the GBP.
• Recent inflation data was mixed despite the headline rate hitting the BoE’s 2.0% target.

The British pound (GBP) is trading a quarter of a percentage point lower on Thursday at 1.2685 against the US Dollar (USD), following the Bank of England (BoE) monetary policy meeting, a key event for GBP pairs.

Pound weakens after BoE decision

Sterling continues to fall after BoE publish his monetary policy decision on Thursday. The BoE, which sets interest rates in the UK, left its policy rate unchanged at 5.25% at the meeting. The decision was agreed by a vote of 7 in favor of maintaining and 2 in favor of a reduction, the same as in the previous meeting.

He release accompanying it, however, said the decision was “finely balanced”, suggesting there was a considerable risk the BoE would cut rates instead.

The BoE mentioned the August decision and how the new information “affects the assessment that risks of persistent inflation are declining,” which was a clue that the bank could be planning to reduce interest rates in August, according to Yohay Elam, Product Manager at FXStreet.

Higher interest rates tend to appreciate the Pound by attracting more foreign capital inflows; The opposite is true for lower interest rates. The BoE’s decisions therefore strongly impact the Pound.

The downside to the Pound is likely to remain limited, however, by the BoE’s second-half inflation forecast, which sees a rise to 2.5% annually.

The decision was in line with market consensus, which was to not cut rates and a 7-2 voting split, with 2 in favor of a cut. It is very rare for the BoE to change interest rates during an election campaign. BoE Governor Andrew Bailey himself said that a rate cut at the meeting could be, “neither ruled out nor a fait accompli.”

Even though UK Consumer Price Index (CPI) inflation data showed a drop to the BoE’s 2.0% target in May, high inflation in other sectors of the economy continues to keep policymakers cautious about cuts, with a first rate cut not likely until August.

“In the UK, there was another important milestone yesterday as CPI inflation fell exactly in line with the Bank of England’s target, reaching +2.0% in May as expected,” says Jim Reid, Global Head of Macro Research. at Deutsche Bank. “However, some of the details of the report were less favorable, as the core CPI was higher at +3.5%, while services inflation surprised to the upside at +5.7% (vs. +5.5% expected), and “That is one of the most persistent categories. As a result, investors reduced the probability that the Bank of England would cut rates by the August meeting, with the probability falling from 52% to 34% at the close.”

On Thursday morning, Swiss Franc traders were given some volatility to play with after the Swiss National Bank (SNB) decided to cut interest rates for the second consecutive time to 1.25%. The decision, however, was widely expected, with two-thirds of economists polled by Reuters before the event saying they thought the SNB would cut. Still, the SNB’s decision does not particularly serve as an accurate barometer of what to expect from the BoE.

Technical Analysis: Sterling lacks direction after downside break runs out of steam

GBP/USD is pulling back after breaking below the lower (red) trend line of an ascending channel. From a technical perspective, the short-term trend is unclear and the pair could break down or recover.

GBP/USD Daily Chart

The sharp decline that saw GBP/USD break below the channel bottom could be a sign that the short-term trend is reversing. However, the lack of downward follow-through after the breakout warns traders against becoming too bearish.

A break below the 1.2657 level (June 14 low) would provide further evidence of a shift to a short-term downtrend, with an initial target at 1.2601, the extension of the height of the move before the break below the channel, extrapolated downwards.

On the other hand, a break above the 100 SMA at 1.2740 could signal resumption of the previous bullish bias, with a target at the bottom of the channel around 1.2775.