Cable holds just below 1.25 ahead of BOE policy decision

With the BOE in focus, let’s take a look at the levels in play for GBP/USD and how the decision might affect sterling.

The pair ran up to test the 50.0 Fib retracement level at 1.2596 on Friday before easing back. And with the dollar regaining some composure this week, we are seeing a slight drop under the 1.2500 mark. The failure to lock in a firm break above the 200-day moving average (blue line) is also reinvigorating sellers for now.

So, let’s see how that is playing out in the near-term chart.

There is some minor support around 1.2478-93 that is keeping price action more compact for now. But a break below that and the 1 May low of 1.2466 and GBP/USD will be exposed to some vulnerabilities in a chase towards 1.2300 again. That is at least the take from a technical perspective.

As for any upside return, buyers will have to push price back above 1.2500 and into the cluster of the 100 (red line) and 200-hour (blue line) moving averages first. The latter is seen around 1.2525-30 and that will be a defining region to watch going into the BOE as well. Keep below and the near-term bias remains more bearish. But break above, and the near-term bias switches to being more bullish instead.

So, what can we expect from the BOE?

The central bank is trying to sell the story that they are making progress on the inflation front. That is to help work an angle towards taking the first steps to cut interest rates. However, I would argue that the latest CPI report here is still not enough to convince.

As such, the BOE is likely to maintain the status quo and reaffirm that price pressures are still moderating but they would prefer more progress. Or in their words, things are “moving in the right direction but not yet at the point to cut interest rates”. And that they will “keep under review for how long the bank rate should be maintained at its current level”.

If we are to see such a straightforward decision, there shouldn’t be much fireworks in sterling. That will make for some light pushing and pulling depending on how traders take to the overall language.

The odds of a June rate cut are at ~46% with August more or less fully priced in at ~96%. So, any sterling softness will come from traders pricing out June but I don’t think the BOE will offer much to change the outlook for August as of yet.

All in all, I see the dollar side of the equation bearing more importance when it comes to GBP/USD in the next week. That especially as we have the US PPI, CPI, and retail sales data due in the week ahead.

This article was written by Justin Low at www.forexlive.com.