Market Analysis

Pound Sterling Declines Amid US Dollar's Rebound and Pre-BoE Policy Decision Uncertainty

Amos Simanungkalit · 08 May10.8K Views

The Pound Sterling (GBP) has dipped below the critical threshold of 1.2500 against the US Dollar (USD) during Wednesday's London trading session, encountering significant downward pressure. This decline in the GBP/USD pair is attributed to several factors, including a robust resurgence of the US Dollar and uncertainty prevailing ahead of the upcoming interest rate decision by the Bank of England (BoE) scheduled for Thursday.

It is widely anticipated that the BoE will maintain the current interest rate at 5.25%, marking the sixth consecutive time without adjustment. However, there's a possibility that the BoE might adopt a slightly dovish stance concerning future interest rate trajectories.

This sentiment stems from the confidence expressed by BoE Governor Andrew Bailey during the annual Spring Meeting hosted by the International Monetary Fund (IMF) last month, where he suggested that headline inflation might have reached the targeted 2% mark in April.

Market sentiment suggests a growing expectation for interest rate cuts starting from the June meeting, with traders pricing in a potential reduction of 53 basis points (bps) throughout the year. This projection implies the likelihood of at least two quarter-point cuts. The momentum towards this expectation gained traction following comments made by Andrew Bailey in the previous monetary policy meeting, where he acknowledged that speculation about two or three rate cuts in the year ahead is plausible.

From a technical standpoint, the Pound Sterling's decline below 1.2500 signals a notable development. The GBP/USD pair has faced resistance after encountering a strong neckline of a Head and Shoulders (H&S) chart pattern on the daily timeframe. The sell-off intensified on April 12 when the pair breached the neckline of the H&S pattern established since December 8, originating around the 1.2500 mark.

Investor sentiment has turned cautious regarding the short-term outlook as the GBP/USD pair struggles to sustain levels above the 20-day Exponential Moving Average (EMA) positioned around 1.2520.

The 14-period Relative Strength Index (RSI) is currently oscillating within the 40.00-60.00 range, indicating a state of indecision among market participants.