Traders and investors are feeling a bit of relief as the most important event that unfolded today brought some good news. The question for many traders is whether they are reading the right signal or if they are sitting in Disney Land and hoping for things to turn in their favor.
Background
The UK’s economy has been suffering from all sides, and a lot of injuries are self-inflicted. For instance, Brexit has exacerbated the economic challenges facing the UK, with food-related inflation in the UK being the highest among all European countries. In addition, the UK’s government played a very central role in geopolitical tensions, which only made the situation worse. In addition, the Bank of England didn’t adopt the right policies and left things too late, which made the inflation situation worse. While the bank’s control over inflation has significantly improved, further actions are still necessary.
The Bank of England has made a monetary policy decision.
Many people anticipated that the Bank of England would maintain its ultra-high interest rates and make no changes to its monetary policy decisions before today’s event. As expected, the bank didn’t change the interest rates, but the price action for the sterling-dollar moved massively to the downside, making the sterling weaker against the dollar. The reason that this move happened was primarily due to the fact that during this event, we saw one more member of the MPC’s monetary policy committee moving towards the dovish side and adding pressure on the bank’s governor, Andrew Baiely, to begin the process of cutting interest rates.
Generally speaking, when the bank cuts interest rates, the currency becomes weaker, and when the central bank increases interest rates, the currency moves higher.
What is expected now?
Traders now expect the Bank of England to cut interest rates by 25 basis points in its June meeting. Later in the year, traders expect another rate cut of the same magnitude, meaning that the current 5.25% interest rate will drop to 4.75% by year-end.
The Caution
Traders need to be optimistic, but at the same time, they also need to be cautious with their approach. The reason we think it is important is because the Bank of England hasn’t shown satisfaction with inflation, but it is certainly not fully comfortable with saving that things are where they like them to be. This is because inflation in the country is still at 3.2%, whereas the bank’s target is 2%. Food inflation is unlikely to come down massively, and the situation is the same with services and products as well. The only thing that is likely to help both of them is energy prices, which have eased off from their peak. But with geopolitical tensions continuing to remain in place, we are unlikely to see a dramatic drop in the inflation rate, which would move the price towards 2%.
The Price Action
The sterling-dollar pair, which was very much showing a bullish signal before the event, has violated all the signs. Ahead of the meeting, the sterling-dollar pair had formed a bullish pattern—a reverse head and shoulder pattern. However, the fundamentals were telling us that the Bank of England was going to be dovish in its approach, which means we would get a more bearish move, and this is exactly what happened, as you can see from the chart below. The next important support zone will be near 1.2405.
Forex Trading Chart by AvaTrade: GBPUSD
