The pound reacted negatively to the results of the Bank of England's February meeting. The GBP/USD pair fell sharply by more than 100 pips, nearing the support level of 1.2350. This level coincides with the middle line of the Bollinger Bands indicator and the Kijun-sen line on the daily chart. Although sellers were unable to breach this price barrier decisively, bearish sentiment for the pair remains strong.
This decline occurs despite the US dollar index being under pressure on Thursday, following mixed JOLTs and ADP reports, along with a decrease in the ISM business activity index in the services sector. Therefore, the downward movement of GBP/USD is primarily due to the weakening of the British currency. The BoE has not supported the pound—on the contrary, it has taken a more dovish position than what most analysts anticipated.
Traders had already factored in the results of the BoE's February meeting when the inflation data for December was released in January. This report showed a slowdown in key indicators, notably a significant decline in services sector inflation. This data led the market to anticipate an additional rate cut by the central bank. As expected, the BoE lowered the key interest rate by 25 basis points, aligning with the most anticipated scenario.
As the saying goes, the devil is in the details. One of the surprises was the breakdown of the rate vote. Most analysts predicted a result of 0-8-1, indicating zero votes for a rate hike, eight votes for a rate cut, and one dissenting vote (from Catherine Mann) to keep the rate at 4.75%. However, in reality, even Catherine Mann, the most hawkish member of the committee, supported easing monetary policy. Additionally, two members voted for an even more aggressive cut of 50 basis points.
The pound faced further pressure from BoE Governor Andrew Bailey, who hinted at additional easing measures. He stated that while a slight increase in overall inflation is possible, it is accompanied by a continued, gradual, and sustained decline in core inflation indicators. He also noted that the UK labor market is cooling and that businesses are hesitant to pass on costs to consumer prices.
Bailey did not specify the anticipated path for the rate cut, noting instead that the Bank would evaluate the situation at each upcoming meeting. However, he did mention that, according to the Bank's overall expectations, the BoE may be able to lower the rate further in the future. Given that all nine members of the Monetary Policy Committee voted in favor of additional easing of the monetary policy , it is clear that Bailey reflected the consensus view of his colleagues.
The pound responded negatively to the disappointing PMI (Purchasing Managers' Index) for the UK construction sector, which unexpectedly fell into contraction territory at 48.1, compared to a forecast of 54.5. This January figure represents the weakest performance since December 2023 and adds to the case for further monetary easing.
Additionally, recent GDP data for the UK was underwhelming, showing only 0.1% growth, falling short of the weak forecast of 0.2%. Furthermore, the BoE has revised its economic growth forecast for the UK for 2025 down to 0.75%, a reduction from the 1.0% projected in November.
After the BoE's February meeting, the pound faced downward pressure, causing the GBP/USD exchange rate to fall to the 1.2350 support level—the midline of the Bollinger Bands indicator—which coincides with the Kijun-sen line on the daily timeframe. However, the bears were unable to break this crucial support level, making further short positions riskier for the time being.
Traders are now cautious ahead of the January Nonfarm Payrolls (NFP) report, which is scheduled for Friday. According to preliminary forecasts:
- Unemployment in the U.S. is expected to remain at 4.1%,
- Job creation is projected to rise by only 170,000,
- Average hourly earnings growth is expected to slow to 3.8% (from 3.9% in December).
If the unemployment rate unexpectedly drops to 4.0%, employment growth surpasses 200,000, and wage growth either remains steady or accelerates, the U.S. dollar will gain significant support, potentially pushing GBP/USD down toward the 1.2300 level. Conversely, if the Non-Farm Payroll (NFP) figures disappoint, the U.S. dollar may face renewed pressure, causing GBP/USD to rebound towards the 1.2500 area.
Short positions in GBP/USD should only be considered if the pair breaks below 1.2350, with the next downside target being 1.2300 (the lower Bollinger Band on the H4 timeframe). The main target for a bearish move would be 1.2150 (the lower Bollinger Band on the daily timeframe).
