GBP/USD: BOE may compound the Fed and trigger greater downfall
The Brexit bonanza has proved short-lived – Pound bulls prematurely celebrated Prime Minister Boris Johnson’s climbdown before the Federal Reserve sent the safe-haven dollar higher. Now it is the Bank of England’s turn to move cable – and potentially tilt it lower.
Unpacking cable’s moves
PM Johnson agreed to compromise with the “rebels” in his Conservative Party by agreeing to more robust parliament oversight over the Internal Markets bill. This legislation – which is set to receive the House of Commons’ approval next week – knowingly violated the Brexit accord with the EU.
Will Brussels accept the modified version of the bill? The block previously laid down an ultimatum to the UK – rescind the legislation by the end of the month or face sanctions.
The pound advanced in response to Johnson’s climbdown but was unable to hold above 1.30 after the Fed conveyed a worrying message. While the world’s most powerful central bank raised 2020 growth forecasts, it downgraded the one for 2021. More importantly, Federal Reserve Chairman Jerome Powell said the current level of bond-buying is appropriate, disappointing investors.
He also indicated fiscal stimulus would be useful. That may come earlier than expected following weak . Weekly jobless claims figures are eyed later in the day.
Investors had already priced in low borrowing costs for several years and yearned for more cash injections from the bank. Stocks – already off their highs – extended their falls and the safe-haven dollar saw fresh demand.
BOE – seeing the glass half empty?
The Fed’s peers on the other side of the pond have their say now. Andrew Bailey, Governor of the Bank of England, is projected to leave the interest rate unchanged at 0.1% and the Quantitative Easing program at £745 billion.
Markets will be watching the bank’s fresh assessment of the economy moving forward. On the one hand, the recovery beat estimates and unemployment remains low at 4.1% in July. On the other hand, uncertainty about Brexit, the furlough scheme, and the virus – as Northeastern England is hit by new restrictions – may weigh on the outlook.
Pessimism from the BOE may break the tie between Brexit optimism and Fed pessimism, potentially sending the pound down.
GBP/USD Technical Analysis
Pound/dollar is benefiting from upside momentum on the four-hour chart but is struggling to recapture the 50 Simple Moving Average. The Relative Strength Index is stable, indicating a lack of conviction.
Support awaits at 1.29, the daily low, followed by 1.2865, a swing high last week. Next, 1.2820 and 1.2765 are eyed.
Resistance is at 1.2980, a support line from last week, followed by Wednesday’s peak of 1.3010. The next lines to watch are 1.3040 and 1.3110.