BoE Rate Decision: Chances In Favor Of Dovish Outcome

 | Sep 14, 2017 06:25AM ET

There has been a reversal in the market. After a long period of US dollar weakness we finally saw the dollar strengthening against its peers. The greenback gained against the euro and British pound on fresh hopes that a tax plan from the Trump administration is coming soon. However, the dollar became recently incredibly oversold, which is why some correction was inevitable.

The dollar’s relief rally pushed the euro below 1.19 and also the pound sterling traded off its highs Wednesday. Sterling traders await the Bank of England decision scheduled for 11:00 UTC and sold pounds ahead of that highly anticipated event. The U.K. Jobs report showed wages rose less than expected and these weaker figures prompted traders to also brace for a dovish outcome at today’s BoE decision.

While there is little chance that the BoE will announce any material changes to its current monetary policy today, the devil is in the details. Changes in monetary policy are the main drivers in the market and with U.K. inflation already rising toward 3 percent, it is questionable how long the UK authority can justify its 0.25 percent interest rate. If the U.K. monetary policy committee repeats its 7-2 vote for unchanged interest rates, the pound could fall. In the hawkish case of a 6-3 vote, the market would interpret it as a signal that the time for a rate hike is nearing. In that case the pound could rise.

GBP/USD
Whatever the case, we will prepare for both bullish and bearish scenarios, whereby the technical picture is pointing to a bearish scenario:
As long as the price remains below 1.3230 we see chances of a bearish break below 1.3150. A potential head-shoulders pattern predicts upcoming bearish momentum if the pound falls below 1.3160. That pattern becomes void when price breaks above 1.33 again. Lower targets are seen at 1.31 and 1.3030.