The GBP/USD sharp decline accelerated on Monday as traders shifted their focus to the upcoming Bank of England (BOE) interest rate decision. The pair fell to 1.3787, which was the lowest level since April 16. It has dropped by more than 3.25% from this month’s high.
The GBP/USD pair nosedived last week after the Federal Reserve made its latest interest rate decision. In this decision, the bank decided to extend its pandemic response policies further.
The bank decided to keep interest rates at a record low of between 0% and 0.25%. The bank also decided to extend its quantitative easing policy program. The only change in tone was that the bank pointed to a rate hike in 2023, earlier than the previous guidance of 2024.
This decision pushed the US dollar index sharply higher as investors started to reassess their portfolios. This is because analysts now expect that the bank will start to taper its $120 billion a month quantitative easing (QE) program in the near term.
Still, upcoming economic numbers will provide further guidance on what the Fed will do. If the US inflation continues to strengthen and if the labor market keeps tightening, there is a possibility that the bank will start getting hawkish earlier than expected.
As such, this week, the focus will be on Jerome Powell, the Fed chair. He will testify in Congress and will be asked about the latest decision and what it means for the country. His first day of testimony tends to lead to significant moves in currency pairs that have the US dollar.
Bank of England decision
The biggest catalyst for the GBP/USD pair this week will be the BOE interest rate decision that will come out on Thursday. The decision comes at a time when the UK economy is experiencing a strong recovery, as evidenced by numbers released last week.
The data showed that the country’s unemployment rate declined from 4.9% to 4.8% in April as the country continued to reopen. At the same time, the country’s Consumer Price Index (CPI) rose to 2.0% for the first time in months. This inflation was at the same level as the Bank of England’s target of 2.0%.
Further data released on Friday showed that the country’s retail sales declined in May. This happened as more people traveled and opted for outdoor activities. Analysts, including those at ING, expect that the country’s retail sales will bounce back in the coming months.
Therefore, the GBP/USD will react to the statement by the BOE. Like the Fed, the bank should leave interest rates and the quantitative easing program unchanged. But the bank could signal that it will start tapering its asset purchases sooner than expected.
GBP/USD technical analysis
On the four-hour chart, we see that the GBP/USD pair declined sharply last week after the FOMC decision. The pair managed to move below the important support at 1.4095, which was the neckline of the head and shoulders pattern. Also, it managed to move below the 25-day and 15-day Exponential Moving Averages (EMA).
Meanwhile, the two lines and the histogram of the MACD have also moved below the neutral line. Therefore, the pair will likely keep falling as investors target the next key support level at 1.3700. However, a move above the resistance level at 1.3900 will invalidate the bearish view.