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The long-awaited Bank of England meeting last week turned out to be a disappointment for the pound. The interest rate was not raised: out of nine members of the Monetary Policy Committee only two voted for a tightening. In this backdrop, the GBP/USD pair lost more than two pips by the end of the week. How low can sterling fall now?
GBP/USD
The possibility of a rate hike by the Bank of England was raised in mid-October. Central bank governor Andrew Bailey said that the rapidly rising inflation rate might require drastic measures.
Since then the GBP/USD pair has risen by almost two figures on expectations: from values near 1.3600 to the area above 1.3800.
However, many realised that Andrew Bailey would find it difficult to persuade Monetary Policy Committee members to agree to a rate hike in November. The economic recovery still looks rather shaky and the labour market has not yet returned to pre-pandemic levels.
For example, Silvana Tenreiro, as well as other central bankers who voted against a rise, said that the employment situation must continue to be monitored. On 30 September, the furlough programme, which was in place during the pandemic, ended and it is still too little time to see how this will affect the labour market.
As for inflation, it is now mainly caused by rising energy prices. The situation is very similar to what happened in 2008 and 2011. Most likely, as before, this will not lead to a sustained increase in the consumer price index.
As a result, market expectations did not come true on 4 November and the pound collapsed. GBP/USD fell almost to the September lows in the area of 1.3400. The main question on the table now is: how long can the weakening last?
From a fundamental point of view, the collapse in sterling was caused by disappointment after unreasonable expectations. This is a typical news reaction. And given that there is a chance of a rate hike in December, there may not be any further GBP/USD fall.
From the technical point of view, there is a strong support (mirror level) near the lows of September 30 (area of 1.3400). And if it holds, the pair may move to recovery.
But, in case of breakdown of 1.3400 and fixation under it, the next southward target for GBP/USD could be the area of 1.3100.
07.45 Swiss unemployment rate for October
11.00 Eurogroup meeting
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