Sterling under pressure ahead of BoE decision

Sterling is getting no love ahead of the highly anticipated Bank of England (BoE) rate decision today.

As discussed in our “trade of the week”, the BoE is widely expected to raise interest rates by 25 basis points. However, traders have not fully ruled out a surprise 50bps hike in the face of sticky inflation. In fact, markets are pricing in a 24% probability of such a move – something that could spark explosive levels of volatility on the pound if this becomes reality. But signs of cooling economic growth and recession fears could make this a tough decision for the central bank.

While today’s expected hike will mark the 14th consecutive increase since December 2021, investors will be seeking clarity on what to expect in September and beyond. The quarterly Monetary Policy Report (MPR) and BoE Governor Andrew Bailey’s press conference may offer fresh clues on the BoE’s next policy move.

Focusing on the technical picture…

Bears have taken over the reins from the bulls on the GBPUSD currency pair. 

On the daily charts, the bearish intent was made crystal clear when a lower top occurred on 27 July at 1.29959. Bears then proceeded to break through a weekly support level, forming a lower bottom in the process on 28 July at 1.27630. After a short but weak bullish reaction, bears followed through with a more prominent break, and the weekly support level turned into a resistance level in the process. 

The declining slope of the MACD (Moving Average Convergence Divergence) oscillator and the 50 EMA that broke to the downside shortly after, provided further confirmation that the selling pressure was on the increase. 

When the lower bottom at 1.27630 was breached on 1 Aug with a beautiful Evening Star Candle pattern occurring as well, two targets were possible from there. Attaching the target guideline ( A customized Fibonacci tool) to the lower bottom at 1.27630 and dragging it to a lower top at 1.29959, the following targets were established:

• The first potential target at 1.25068 if there is enough bearish momentum to reach the next weekly support level. 

• The second price target is likely at 1.21575 if the bears can keep up their rein to the weekly support level at 1.20876.

If the lower top that formed on 27 July at 1.29959 is broken, this scenario is no longer valid, and any open risk must be managed tightly. 

As long as the bears keep on making lower tops and bottoms, the market sentiment for GBPUSD on the D1 time frame will remain bearish.